**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**ý****    ANNUAL REPORT UNDER SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2003**

 

**File number 001-15801.**

 

**SUREQUEST SYSTEMS, INC.**

(Name of SmallBusiness Issuer in its Charter)

** **
| **DELAWARE**                                                     |   | **41-1826635**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer Identification No.) |

 

**SUREQUEST SYSTEMS, INC.****13606 TIBLVD****DALLAS,TEXAS 75243-1408****(972)238-7200**

(Address andtelephone number of issuer’s principal executive offices)

 

SECURITIES TOBE REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

**None**

 

SECURITIES TOBE REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

 

**COMMON STOCK, PAR VALUE $.001 PER SHARE**

(Title ofClass)

 

Indicate by check mark whether the registrant(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act of 1934 during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes    ý   No    o

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Regulation S-B is not contained in this form,and no disclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this form 10-KSB. ý

 

Issuer’s revenue for its most recent fiscalyear was $1,347,957.

 

The aggregate market value of the votingstock held by non-affiliates computed by reference to the price at which thestock was sold, or the average bid and asked prices of such stock, as ofDecember 31, 2003 was approximately $6,302,678.

 

State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of December 31, 2003:44,557,222.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

There are no documents incorporated byreference.

 

 

----

 

**TableOf Contents**

 
| Part I   |                                                                                                      |   |
|----------|-----------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                      |   |
| Item 1.  | Description  of Business                                                                                  |   |
|     |                                                                                                      |   |
| Item 2.  | Description  of Property                                                                                  |   |
|     |                                                                                                      |   |
| Item 3.  | Legal  Proceedings                                                                                        |   |
|     |                                                                                                      |   |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                                      |   |
|     |                                                                                                      |   |
| Part II  |                                                                                                      |   |
|     |                                                                                                      |   |
| Item 5.  | Market  for Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Securities |   |
|     |                                                                                                      |   |
| Item 6.  | Management’s  Discussion and Analysis or Plan of Operation                                           |   |
|     |                                                                                                      |   |
| Item 7.  | Financial  Statements (See Financial Section)                                                             |   |
|     |                                                                                                      |   |
| Item 8.  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                     |   |
|     |                                                                                                      |   |
| Item 8A. | Controls  and Procedures                                                                                  |   |
|     |                                                                                                      |   |
| Part III |                                                                                                      |   |
|     |                                                                                                      |   |
| Item 9.  | Directors  and Executive Officers of the Registrant                                                       |   |
|     |                                                                                                      |   |
| Item 10. | Executive  Compensation                                                                                   |   |
|     |                                                                                                      |   |
| Item 11. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters          |   |
|     |                                                                                                      |   |
| Item 12. | Certain Relationships and Related Transactions                                                            |   |
|     |                                                                                                      |   |
| Item 13. | Exhibits  and Reports on Form 8-K                                                                         |   |
|     |                                                                                                      |   |
| Item 14. | Principal  Accountant Fees and Services                                                                   |   |

 

2

----

 

**PARTI**

 

**ITEM 1****.DESCRIPTION OF BUSINESS**

 

SureQuest Systems, Inc. (“SureQuest” or the“Company”) was incorporated under the laws of the State of Nevada on August 19,1941.  On January 24, 2003 and effectiveApril 22, 2003, the Company’s Board of Directors and holders of ConvertiblePreferred Series “A” Stock representing a majority of the voting rights of theoutstanding shares of the Company’s common stock, approved a reincorporation ofthe Company from the state of Nevada to the state of Delaware.  The reincorporation from Nevada to Delawareresulted in an increase in authorized common shares from 50,000,000authorized  Nevada common shares ($.001par value) to 100,000,000 Delaware common shares ($.001 par value) and in anincrease in authorized preferred shares from 1,000,000 authorized Nevadapreferred shares ($.001 par value) to 10,000,000 Delaware authorized preferredshares ($.001 par value).  Thisreincorporation is a merger of the Company into a Delaware corporation of thesame name.  The reincorporation and planof merger provides management the necessary controls to direct the Company’sfuture business operations.

 

On the effective date of the reincorporation,April 22, 2003, the shares of SureQuest Systems, Inc. - Nevada (symbol “DIET)ceased to trade on the over the counter bulletin board market and the shares ofSureQuest Systems, Inc. - Delaware (symbol “SUQU”) began trading.  The Company’s principal place of business is13606 TI Boulevard, Dallas, Texas 75243. SureQuest has an Internet web sitedesignated as www.surequest.com.   TheCompany has not been subject to bankruptcy, receivership or any similarproceeding.

 

**HISTORY**

 

On December 4, 1996, Rosegold Corporation, anon-operating Nevada corporation, issued 12,000,000 shares of its common stockin exchange for all of the issued and outstanding common shares of SureQuestSystems, Inc., a corporation incorporated under the laws of the State of Texason March 15, 1991 and changed its name to SureQuest Systems, Inc.

 

Prior to its merger with the RosegoldCorporation, SureQuest Systems, Inc. had served the healthcare industry since1984 (as a proprietorship until its incorporation in 1991) with dietaryconsulting services, dietary software and “hard copy” menu services. TheCompany developed its DOS modular software product in the early 1990s and addedMicrosoft Windows -Registered Trademark- based software through the acquisitionin June 1998 of the assets of Positive Input, Inc., a Michigan corporation. Theassets of Positive Input, Inc. were purchased for $54,629 in cash (net of cashassumed), 1,721,050 common shares of the Company and the assumption ofapproximately $816,000 in debt.

 

The Company has incurred losses of $790,481and $934,458, respectively, for the years ended December 31, 2003 and 2002. TheCompany has financed these losses primarily through debt financing provided bycertain officers and shareholders of the Company. Without a significant  increase in revenues in 2004, the Companymay not be able to continue operations without additional working capitalsources.

 

The Company’s current financial conditionrequires the Company’s auditor to issue a “going concern” opinion as part ofthe Company’s presentation of its financial statements.  The Company has received a going concernopinion for each of the years 1998 through 2003.

 

**THEBUSINESS**

 

SureQuest Systems, Inc. is a provider ofdietary and food service management software, menu services and dietaryconsulting to the institutional food service industry. Since 1984 the Companyhas focused on developing a client base in healthcare food service,concentrating on the Long-Term Care (LTC) segment of the industry representedby nursing homes and assisted living facilities. The Company’s software andother products are also used in other institutional settings includinghospitals, continuing care retirement communities (“CCRC”), correctionalfacilities and educational facilities. The Company offers its software productin both a DOS and Windows -Registered Trademark- single user and multi-useroperating system format. SureQuest currently serves approximately 1,003healthcare facilities in 46 states and Canada.

 

The Company’s proprietary software providesfood selection and preparation assistance, inventory and personnel costcontrols, improved operating efficiencies, and electronic documentation of themeals prepared and served to a facility’s residents to reduce liabilityexposure and ensure compliance with government nutritional guidelines.

 

**MARKETINGSTRATEGY**

 

SureQuest has penetrated the LTC andhealthcare market through strategic alliances, acquisitions, and direct sales.The Company currently has significant strategic marketing alliances or privatelabel agreements with the following companies:

 

3

----

 

Food Services of America, Inc. – FoodServices of America, Inc. (“FSA”), a Seattle, Washington based fooddistribution company operates primarily in the Northwest and Midwest. Itmarkets a software product called FSA FIRSTLINK -TM-, a private labeled versionof SureQuest’s proprietary Windows -Registered Trademark- food service softwareapplication. FSA also provides a “hard copy” menu service for its customersthrough the Company under the private label SIGNATURE SERIES.

 

SYSCO Canada . – (formerly Serca Foodservice,Inc.), located in Toronto, Canada is a food distributor, which serves theCanadian market. SYSCO Canada markets SERCA SYNERGY -TM-, a private labeledversion of SureQuest’s proprietary Windows -Registered Trademark- software applicationto its institutional customers. Serca Foodservice, Inc. was recently acquiredby Sysco Corporation, the largest food distributor in North America, whichchanged the name of the company to SYSCO Canada.

 

Health Technologies, Inc. – HealthTechnologies, Inc., located in Maryland Heights, Missouri, is a dietaryconsulting company with over 135 Registered Dietitians, and markets theCompany’s software products to health care facilities and food distributorsunder the private label SMART SOLUTIONS -TM-. Health Technologies also uses theCompany’s software to produce “hard copy” menus for its consulting clients. Anumber of the Registered Dietitians of Health Technologies also serve ascertified trainers for the Company’s software.

 

The Company also has a number of otherstrategic marketing alliances that are in the development process and have notcontributed significant revenues to date. In addition, the Company’s direct sales department is focused ontargeting large multi-facility healthcare companies.  During 2003 the Company executed a long term agreement with acompany having approximately 290 facilities that provides for software licenseinstalls in each of the facilities and hard copy menu services to each of thefacilities without software installation. To accelerate this marketing focus, the Company has employed two newemployees to target the health care market. The two employees accepted positions with the Company on October 2003and March 2004, respectively.

 

On October 6, 2003, a significant fooddistributor customer terminated its relationship with the Company.  This customer, representing 28% and 20% ofthe Company’s total revenues for the years 2002 and 2003, respectively, electedto prepare in-house its own hard copy menus to its customers.  During 2004, the Company continues to supplydietary services to certain facilities that represent approximately 20% of thetotal revenues previously earned from that customer.

 

During the years 2003 and 2002, approximately64% and 54% of total revenues are attributable to four customers, three ofwhich represent the Company through private label software products and menuservices.  One of these customers,representing 28% and

 

20 % of the Company’s revenues during 2002and 2003, did terminate its relationship with the Company as discussed in thepreceding paragraph.  We are also infinal discussions to extend our agreement with one of these customers.  The current agreement has expired but wecontinue to provide new license installations and technical support services,pending the formal extension of the agreement.

 

4

----

 

**PRODUCTSAND SERVICES**

 

The Company’s primary products and servicesinclude Food Service Management Software, Dietary Database Management, HardCopy Menu Services, Paper Products and Supplies and Customer Software SupportServices.

 

**FOODSERVICE MANAGEMENT SOFTWARE**

 

Currently, the Company offers a suite ofMicrosoft Windows -Registered Trademark- and DOS based nutritional softwareprograms designed to allow health care institutions, primarily LTC facilities,hospitals and CCRCs to more effectively and efficiently serve their residents.The Company’s software provides solutions in the areas of patient and menumanagement, inventory control, production management, purchasing and costcontrol, documentation to reduce liability exposure, and compliance withHealthcare Finance Administration (HFCA), Hazard Analysis Critical ControlPoint (HACCP) and other government nutritional guidelines.

 

Also, the Company’s software allows LTCfacilities to more easily comply with the changes in Federal Governmentregulations regarding reimbursement of operational costs and the new electronicreporting requirements. Specifically, the Company’s software provides facilitiesthe ability to more easily comply with the Federal Government’s PPS(Perspective Payment System) reimbursement guidelines.  A resident is listed as “ClinicallyComplex”, under the Federal Government’s MDS (Minimum Data Set) regulations, ifhe or she receives 51% or more of their calories through tube feeding or 26% ofcalories and over 500 cc’s of fluid from tube feeding. Additional reimbursementdollars are available to facilities for Clinically Complex residents under PPSguidelines.  The Company’s software alsoprovides facilities with weight management tracking for each resident for datasubmission to the Federal Government under MDS regulations. In addition, theCompany’s software helps facilities comply with several other nutrition anddietary requirements under the following MDS Quality Indicator Domains: #3Clinical Management; #4 Cognitive Functioning; #7 Nutrition and Eating; #8Physical Functioning; #10 Quality of Life and #12 Skin Care.

 

The Windows -Registered Trademark- - basedsoftware, Three Squares -Registered Trademark-, establishes nutritionallybalanced diets (conforming to government requirements) for the residents in aLong Term Care facility. The diets are then translated into actual menuscontaining the proper foods for the three meals and snacks to be served by thefacility for each day. The software can maintain a menu cycle of 1 to 13week(s), indicating when particular meals or food items will be served (forexample, the cycle may show that two weeks from tomorrow, chicken will beserved as the main entree). At the end of the scheduled cycle, the entire menucycle begins again, allowing the Company to continue to know what foods will beserved in the future. Institutions typically serve “warming” foods during theFall/Winter cycle and lighter, “cooling” foods during the Spring/Summer cycle,hence two menu cycles per year. The foods can also be tailored to differentgeographic regions of the country. The software maintains a list of more than50 separate nutrients for each meal item served, such that the facility’sdietitian or administrator may access and report the number of calories, gramsof fat, milligrams of vitamin C that an individual resident was served for ameal, a day, a week, or any other time period.

 

Another important element of the software isits ability to track each resident’s likes/dislikes and allergies. The softwarecurrently supports 99 special diet types such as low-calorie, diabetic orcardiac. More importantly, during meal preparation and production, the softwareautomatically determines the types and quantities of food to be produced basedon the resident population profiles and then prints out individual tray ticketsthat alert kitchen personnel as to the specific items that should be placed oneach tray. In management’s opinion, the Company’s software databases arecompliant with the Hazard Analysis Critical Control Point (HACCP) programguidelines, as incorporated in the U.S. Food Code.

 

Since 2001, the Company has introduced  three new products (which are updatedversions of existing products) to enhance its suite of Windows based softwaresolutions for healthcare and other institutional foodservice environments.Three Squares -Registered Trademark-, Version 4.0, was introduced during 2002and allows clients the ability to operate in either single user or multi userenvironments using 32-bit architecture. Version 4.0 also incorporates several additional enhancements to improveproductivity at client facilities. The second new product introduced was the ThreeSquares Centralized Management System (CMS) to allow corporate/chain clientsthe ability to control menu and recipe data from a centralized office and thenupload the menus and data to their individual facility sites. With centralizedmanagement control capabilities, the CMS product is presently installed and inuse by many corporate clients. In addition to these two products, the Companyintroduced its Square 1 -TM- product that is essentially a “slimmed down”version of the Company’s Three Squares software product. Square 1 providesessential basic functionality to facilities at lower costs and can be easilyupgraded to the more comprehensive Three Squares program, as the facilities’requirements increase. During the second quarter of 2003, the Companyintroduced its Three Squares - Registered Trademark, Version 4.1 that expandedand enhanced functionality of the software, including the import-export andinventory functions and also allowed for multi-data base access.  In the first quarter of 2004, the Companylaunched Version 4.2 that adds several major enhancements to the existingsoftware; menu writing has been made easier by enlarging the menu edit screenand using color codes for menu items; a “global add” feature was added allowingthe user to add forgotten items, “default” items or substitution items to anymenu, menu day or diet type; and a recipe index option was added to facilitatethe use of multiple printed recipes.  Inaddition, new reports and other features were added and former reports andfeatures were enhanced to help our customers.

 

5

----

 

The Company offers software products that arecompatible with two of the popular computer operating systems: Microsoft’sWindows -Registered Trademark- and DOS. The Company believes that its softwareprograms can be readily adapted to any changes in the aforementioned operatingsystems or to new operating systems without significant cost. Any such changesor updates would be accomplished by staff personnel or by outside independentcontractors depending on the complexity of the change or update.  A significant number of customers haveupgraded the DOS to the Windows version and the percentage of annual revenuefrom the DOS product as compared to total revenues continues to decrease eachyear.

 

**DIETARYDATABASE MANAGEMENT SERVICES**

 

Customers can elect to have their dietarysoftware database managed by SureQuest’s Registered Dietitians.  SureQuest manages the diets, ingredients,recipes and menus that provides “electronic” menu services to thesefacilities.  The menu servicesintegrates with the facility information to provide the reports and informationfor daily dietary operations.  SureQuestprovides this service to approximately ten corporations that serve 174facilities.

 

**HARDCOPY MENU SERVICES**

 

The Federal government regulations requirethat LTC facilities use a Registered Dietitian, on either a full time, parttime or by consulting contract, to review the menus and nutritional programsfor the LTC residents. Certain State governments require that each LTC facilityin their state demonstrate a minimum number of dietitian hours to plan andassess the nutritional needs of the LTC residents. For the facilities thatcannot afford paying for additional hours for these dietitians to developnutritionally adequate menus, the Company has a “hard copy” menu serviceprogram that meets the government requirements. This service provides menuplanning, nutritional analyses, production recipe books, spreadsheets and postingmenus. Approximately 330 facilities are using the Company’s “hard copy” menuservice business throughout the U.S.

 

6

----

 

The Company’s staff prepares each menu withattention to every detail of color, texture, and shape of individual foods toenhance the visual appearance of the meal. Meals are analyzed for nutrientcontent and compared to the Recommended Daily Allowances, as established by theNational Academy of Sciences. Menus are certified by either the facility’sregistered dietitians or by one of the Company’s registered dietitians withrespect to meeting the nutritional requirements and standards specified by thefacility. Scaled, quantity recipes included with the menu services are intendedto be compliant with the Hazard Analysis Critical Control Point (HACCP) programguidelines, as incorporated into the US Food Code.

 

**PAPERPRODUCTS AND SUPPLIES**

 

The Company provides dietary paper products used by the facilities in their deliveryof meals to residents.  The Company alsoprovides related supplies including labels and ribbons.  The expansion of this business segment islimited due to the freight and handling costs associated with delivery.

 

**CUSTOMERSOFTWARE SUPPORT SERVICES**

 

The Company provides the following support toits customers:

 

Customer Support Center. The Company providescustomer software support at several levels, from answering user questions onthe implementation of the Company’s software to technical questions on thedatabase and software performance. Services are provided 24 hours per day/7days per week via toll free telephone number or through the Internet using theCompany’s Internet Training and Support Program. The internet access servicewas introduced in 2002 and has significantly added to the effectiveness of thesupport function.

 

Strategic Alliance Training Program. TheCompany has developed a “train the trainer” program that trains strategicalliance personnel capable of training end users on the use of its dietarysoftware. Health Technologies, Inc., one of the Company’s strategic marketingpartners, participates in this program. Food Service of America and SyscoCanada are also participating in this training program, which allows theCompany to support its planned growth in software sales without significantlyincreasing training costs.

 

Internet Training and Support Program. During2002, the Company introduced its new Internet Training and Support Programdesigned to offer client training and support using Internet based technology.This technology allows the Company to provide greater training and supportcapabilities for its clients. It also assists in managing the continuoustraining and support of new personnel due to the high turnover rates withhealthcare food service staff. In addition, the Company’s sales personnel usethis technology to provide real-time, live product demonstrations via theInternet to prospective clients. Utilizing this technology in the sales processsaves valuable time and sales travel related expenses.

 

**FUTUREPRODUCT DEVELOPMENT**

 

The Company continues to pursue its strategicplan: (i) increase current target market share; (ii) expand the Company’starget markets; and (iii) vertically integrate with supply chain partners. Partof this strategy will allow the Company’s customers to electronically accessmenus and menu data, using the Internet, to more efficiently manage their foodservice operations.

 

During 2004, the Company plans to develop andintroduce a dietary clinical module. The Company’s current customers have requested this product.  The Company is exploring other productsegments that are compatible with its core market base to significantlyincrease revenues.

 

To meet demand for web-based thin-clientapplications, the Company is planning the evolution of its software products tobrowser-based solutions.  This enableslarger corporations to lessen the information technology demands on theirsatellite facilities and increases data transfer security.  It also opens new markets to the Companythrough subscription licensing.

 

**PRICINGSTRATEGY**

 

The Company offers a flexible pricingstrategy to meet the financial requirements of a broad range of clients. Tofacilitate this strategy, products and services provided by the Company areoffered to clients either through purchase contracts, lease agreements ormonthly rental programs. The Company’s pricing strategy is designed toeffectively penetrate targeted markets with affordable solutions that bringpremium value to its clients and accelerate revenue growth and profitabilityfor the Company.  The long term careindustry’s financial health has been particularly impaired due to the economicdownturn and cutbacks in government funding. However, there appears to be improvementand technology solutions that result in lower operating costs due to improvedefficiencies are especially important for survival to the long term careindustry.

 

The Company receives license fees for itssoftware, on-going maintenance and support fees for software licenses, softwaretraining fees, hard copy menu service fees, data base management fees andrevenues from the sale of paper products and supplies to its clients.

 

7

----

 

Size of Markets Served. The U.S. populationis rapidly aging and the over-65 group is expected to double by the year 2030.LTC facilities will grow, over time, to meet the demand of this demographictrend and will require use of dietary software to operate efficiently. Thefastest growing market serving the aging population is Assisted Livingfacilities. At present, it is estimated that only 25-30% of the LTC facilitiesin the U.S. use dietary software.

 

The following chart sets forth theapproximate number of facilities in the United States:

 
| **PRIMARY MARKETS SERVED** |   | **# OF  FACILITIES** |   |
|----------------------------|--------|----------------------|--------|
|                       |   |                 |   |
| Nursing Homes              |   | 17,023(              | 1)     |
| Assisted Living Facilities |   | 33,000(              | 2)     |
| Hospitals                  |   | 5,794(               | 3)     |
| Total                      |   | 55,817               |   |

 

8

----

 

----

(1) HCFA - OSCAR Form 672: F78-F93, currentsurveys as of September 2000.

 

(2) National Center for Assisted Living,published in 2001

 

(3) 2002 Annual Survey conducted by HealthForum, an affiliate of the American Hospital Association - Total Number of AllU.S. Registered Hospitals

 

The above markets do not include other institutionalmarkets into which the Company plans to expand in the future, to includeadditional correctional facilities, educational facilities, business andindustry and Government institutions, such as the Veterans Administration(“VA”) and the military.

 

**COMPETITION**

 

Several competing software companies havedietary software that target the healthcare industry, including the LTC market.Primary competitors are GeriMenu located in York, Pennsylvania, which is nowowned by C-Bord; a dietary software company; Computrition located inChatsworth, California; and C-Bord located in Ithaca, New York. The Company’sbest estimate is that only 25-30% of the kitchen operations in LTC facilitieshave dietary software in order to make their operations more efficient and costeffective. The Company believes that because of the effect of the ProspectivePayment System there is now a much greater demand for dietary software in theLTC industry and that there will be a faster penetration in the future of theremaining 70-75% of the market which is not computerized. Of the approximately25-30% of the market which is computerized, the Company’s best estimate is thatthe Company has approximately 20% of this penetrated market and GeriMenu, theCompany’s primary competition, has approximately 20%. The Company does not havesufficient information to evaluate the market shares of Computrition or C-Bord(outside of GeriMenu). There are other software companies including DataControl, Diet Master, DFM, FMG Software Systems, HyperGen, NutriMax, Nutri-Net,Reliable and UniSoft serving the dietary market, but to the best estimate ofthe Company, none has a significant market share in the LTC market segment.

 

9

----

 

**PATENTS,TRADEMARKS, SERVICE MARKS, LICENSES**

 

The Company has a copyright and a registeredtrademark for its Windows -Registered Trademark- based software product, ThreeSquares. In addition, the Company has received a registration for thetrademark: Technology that Feeds America -Registered Trademark-. The Companyalso is in the process of applying for a trademark for its Square 1 -TM-product. The Company has developed other software products including SurePref-TM- which tracks a resident’s food preference and SureWeight -TM- which tracksthe weight gain and loss of each resident in a facility. The Company treatsthese products as proprietary and as trade secrets.

 

**EFFECTOF GOVERNMENTAL REGULATIONS ON THE BUSINESS**

 

There are no governmental regulationsaffecting the conduct of the Company’s business other than the normal and usualgovernmental regulations affecting all businesses. The primary market for theCompany’s services is the LTC industry, which is a highly regulated industry.Therefore, the Company’s customers are subject to numerous governmentalregulations, including Medicare and Medicaid, which directly affect thefacilities’ ability to pay the costs of the Company’s products and services.

 

Fixed Rate Medicare/Medicaid Reimbursements.The Balanced Budget Act of 1997 adopted a completely new and uniquereimbursement system for payment for services rendered by nursing facilitiesand other healthcare providers to Medicare patients. As of July 1, 1998 andthereafter, all healthcare providers will be paid for services rendered to Medicarepatients in accordance with the Prospective Payment System (PPS). Prior to thatdate, services provided to Medicare patients were paid pursuant to a cost-basedreimbursement system.

 

The PPS reimbursement system is price-based.The prices are set in advance by the Health Care Financing Administration(HCFA), the government agency responsible for administration of Medicare. UnderPPS the per diem rate paid to the healthcare provider is all the providerreceives.  There are no settlements oradjustments and the costs incurred by the healthcare provider do not in any wayimpact the price HCFA is willing to pay for the services being provided toMedicare patients.

 

The practical impact of this change in theMedicare reimbursement system is that the healthcare providers are being paidsubstantially less per diem for each Medicare patient and that all healthcareservices provided to that patient (i.e., direct care, indirect care, and allancillary care) must be paid from that substantially reduced per diem PPSreimbursement from Medicare. Under the previous cost-based reimbursementsystem, All healthcare provider was paid for each component of care, directcare, indirect care and ancillaries, at cost plus a percentage increase. Underthe cost-based system, the amount reimbursed by Medicare would increase ordecrease based upon the actual costs incurred by each healthcare provider.These increases and decreases applied to both direct care and ancillary careproviders.

 

Under the PPS reimbursement system the healthcareprovider is paid one per diem price per patient. The per diem reimbursementprices paid by HCFA are established by a reimbursement formula that is basedupon a government study of patient acuity levels. All patient care, includingdirect care and ancillary care, must be paid from that per diem price. The perdiem reimbursement under PPS for all healthcare providers is less than mosthealthcare providers previously received on a per diem basis under thecost-based Medicare reimbursement system. All healthcare providers (i.e., the nursing facility and all ancillaryproviders — radiology, pharmacy, lab, medical supplies, therapy, etc.) thatprovide healthcare services to a Medicare patient must be paid from thatsmaller per patient per diem reimbursement. In essence, the Medicarereimbursement monies became significantly smaller, and all healthcare providersmust now share in that smaller amount of reimbursement monies.

 

As a result of this Medicare reimbursementsystem, all healthcare providers that provide healthcare services to Medicarepatients are doing everything possible to reduce the costs of their operations.This situation provides an opportunity for SureQuest.

 

The dietary software sold by SureQuest cancreate significant savings for its users. The savings generated by use of the SureQuest software occurs in boththe dietary department and the nursing department of each facility. The savingsare generated by reductions in food and food preparation costs, food usage,dietary hours and nursing hours.

 

Other Healthcare Reimbursement Programs.Other sources of reimbursement available to healthcare providers includeMedicaid, private insurance, HMOs, Veterans Administration (“VA”) and privatepay. Medicaid is a federally funded, state administered health insuranceprogram for low-income individuals. Since the program is state administered, itvaries from state to state. However, there have been no significant changes inthe Medicaid program in recent years. And because the Medicaid program is the largesthealthcare reimbursement program in terms of dollars reimbursed, the lack ofsignificant changes in the program has created stability for those healthcareproviders that are primarily dependent upon Medicaid reimbursement.

 

Other reimbursement programs, includingprivate insurance, HMOs, VA and private pay, have experienced few significantchanges in recent years. Private pay residents pay what the LTC facilitiesnormally charge. Private insurance, HMO’s and the VA are still cost-basedpayers, but, to one extent or another, these programs are evaluating changingtheir reimbursement to a per diem price per patient 

 

10

----

 

similar to Medicare. Because these programsare still cost based, residents whose needs are reimbursed by such programs arehighly sought after. As a result, a significant amount of marketing effort isexpended to attract these residents to a LTC facility. The nutritional program(menus and diets) is an important part of these marketing efforts. Therefore,the Company’s software and menu services products add value to these marketingefforts and the Company uses the “value added” feature to increase its sales toLTC facilities.

 

In 1996, the Health Insurance Portability andAccountability Act of 1996 (HIPPA) became effective and final rulesimplementing the HIPPA Act were released by the Department of Health and HumanServices (DHHS) on February 13, 2003. The Company has evaluated the extent towhich the HIPPA rules apply to the Company’s business and has determined thatthe Company does receive from certain of its customers Protective HealthInformation (“PHI”) and, to that extent, the Company will obtain a signedbusiness associate agreement with these customers to protect the confidentialityof the PHI. The Company does not expect that any such compliance would have anysignificant adverse impact on the Company’s business or how it does itsbusiness.

 

11

----

 

**AMOUNT SPENT ON RESEARCH AND DEVELOPMENT**

 

**PRODUCTDEVELOPMENT**

 

During the prior five years, the Company hasdevoted resources to significantly improve and increase features andfunctionality of its Windows -Registered Trademark- based software products.During the fourth quarter of 2002, the major components of these improvementshave been completed. These improved features allow the Company to expand itsmarket penetration in other institutional food service environments, includinghospitals, continuing care retirement communities, assisted living facilitiesand correctional facilities. The Company’s 16-bit version of the Window-Registered Trademark- software runs under Microsoft’s older operating system,Windows -Registered Trademark- 3.1 and limits access to the program to one userat a time. In 2002, the Company finalized development of its new 32-bit Versionof its Three Squares Program (Version 4.0) which is designed to run underMicrosoft’s newer operating systems, Windows -Registered Trademark- 95/98, 2000and XP and Windows -Registered Trademark- NT with the result that it is“multiple user” meaning that multiple users can access the programsimultaneously. The availability of Version 4.1 also allows the Company toconvert its Menu Service Bureau to its new Windows -Registered Trademark- systemcreating significant increases in productivity from the faster program. Thisprocess continues to be developed and the Company plans to complete thisconversion during 2004.

 

During the first quarter of 2004, the Companylaunched Version 4.2 that adds several major enhancements to the existingsoftware: menu writing has been made easier by enlarging the menu edit screenand using color codes for menu items; a “global add” feature was added allowingthe user to add forgotten items, “default” items or substitution items to anymenu, menu day or diet type; and a recipe index option was added to facilitatethe use of multiple printed recipes.  Inaddition, new reports and other features were added and former reports andfeatures were enhanced to help our customers.

 

The Company also released a 32-bit upgrade toits existing Export/Import utility application in 2000 and made additionalenhancements in 2002. This utility is a companion to its core Windows systemthat allows corporate customers to centrally create menu data bases and send(export) them to all their facility locations. Using this utility, managementbelieves corporate clients will be able to maintain control over programfunctions with corporate or regional management determining what functionstheir facilities will be able to perform on a day to day basis and whatfunctions will be retained by the central home office. The Company believesthat through its current and upgraded Export/Import utility application,corporate clients are able to limit liability risks by having greaterstandardization among all of its facilities and are better equipped to providegreater quality assurance in their dietary programs. As a result, the Companybelieves that this Export/Import utility application will provide highlydesirable dining service solutions for large chains and other corporate clientsand increase the Company’s penetration in that market sector. The new 32-bitExport/Import utility allows corporate/chain clients the ability to manage menuand recipe data from a centralized office and then upload this information tofacilities in various different locations.

 

As a result of the Company’s developmentefforts, the Company incurred to third parties $38,400 and $22,400 for researchand development in 2003 and 2002, respectively.  The Company’s technical and support fee to each customer supportsthe funding of product development.  TheCompany retains third party programmers that continually are in the process ofupgrading the Company’s products.

 

**EMPLOYEES**

 

The Company has 15 full-time employees andretains four consultants, three of whom provide menu development, training andsupport and the other is the former Chief Financial Officer that is nowretained in an exclusive accounting, reporting and tax preparation capacity.

 

**ENVIRONMENTALCOMPLIANCE**

 

As a software Company, SureQuest has not hadto spend any material amounts of capital or time in compliance with anyfederal, state or local environmental laws and is not aware of any failures incompliance.

 

 **ITEM 2.****DESCRIPTIONOF PROPERTY**

 

The Company operates from a single locationat its****headquarterslocated in Dallas, Texas where it leases approximately 8,300 square feetcomprising the entire one-story building located at 13606 TI Boulevard. Thelease was originally a five-year lease that expired May 30, 2003 with a basemonthly rental of $5,539 and was renewed for an additional five years beginningJune 1, 2003 with a base monthly rental of $5,200. The Company incurred arental expense of $65,851 in 2003 and $63,849 in 2002, respectively, associatedwith this lease. The Company is also responsible for property taxes andinsurance that is in excess of a base year determinant.   The Company has a right of first refusal onthe purchase of the building.

 

The Company subleases approximately 2,000square feet of its office space to a non-affiliated lessee. Terms are $750 permonth with 

 

12

----

 

a lease that expired on May 30, 2003 and thetenant elected not to renew.  On July21, 2003, the Company subleased this space to another non-affiliated lesseewith monthly rental of $1,100.  Thelease term is month to month with the Company retaining a two month securitydeposit.

 

During 2003, the Company sold approximately31.83 acres of vacant farmland in rural southern Dallas County near Wilmer,Texas that it held as investment. The Company acquired the land in 1998 inexchange for 500,000 shares of the Company’s common stock.  Terms of sale were net cash received of$15,488 and a $112,045 note receivable bearing a 7% interest rate with annualpayments of equal  principal andinterest installments of $11,205 beginning August 2004 and each year thereafterwith final payment due August 2013.  TheCompany has assigned these payments to a creditor bank with which the Companyhas a $85,000 obligation.  The creditorbank secured a lien on the land until the $85,000 obligation is retired.  In the event the purchaser defaults on theinstallment obligations, the land will revert to the Company and the Companywill be obligated to redeem the $85,000 obligation or remaining balanceoutstanding directly.

 

**ITEM 3.****LEGALPROCEEDINGS**

 

On February 17, 2004, a Petition was filedagainst the Company in the Circuit Court of St. Louis County, Missouri, CauseNo. 03AC-020399 R CV.  The Company wasserved on March 5, 2004 a summons to appear in the referenced circuitcourt.  The Plaintiffs to the complaintare 33 in number and allege that the Company breached the Telephone ConsumerProtection Act by having sent or causing to be sent, or allowing to be sent,large quantities of facsimile and/or other advertising materials to recipientsin the state of Missouri.  ThePlaintiffs collectively seek judgment in the amount of $165,000 plus courtcosts and other relief as the Court may deem proper.  The Company denies authorizing or participating in any suchtransmission and has retained counsel in Missouri to defend against thecomplaint.  The outcome of thislitigation is not known at this time.

 

On February 27, 2004, the Company announcedthrough an 8-K filing with the Securities and Exchange Commission (SEC) thatthe SEC has issued a Formal Order of Investigation to conduct a non-publicinvestigation of the Company and, but not limited to, its officers, directors,promoters and broker dealers for at least the period from January 1, 2002through the present to determine whether or not violations have occurred of,among other things, the registration, anti-fraud, periodic reporting, ownershipreporting, and books and records provisions of the federal securitieslaws.   Prior to the issuance of thisformal order, the Company has voluntarily produced all documents requested bythe SEC and intends to continue to cooperate with this investigation in allrespects.  The outcome of thisinvestigation cannot be determined at this time.

 

**ITEM 4****. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None

 

13

----

 

**PARTII**

 

**ITEM 5****. MARKET FORCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASESOF SECURITIES**

 

The principal exchange where the common stockof the Company trades is the NASDAQ OTC:BB. The high and low sales prices foreach quarter during the last two years are as follows:

 
| **QUARTER ENDED** |   | **HIGH** |   | **LOW** |   |
|-------------------|--------|----------|--------|---------|--------|
|              |   |     |   |    |   |
| March, 2002       |   | 10.80    |   | 0.80    |   |
| June, 2002        |   | 7.60     |   | 2.00    |   |
| September, 2002   |   | 3.20     |   | 0.80    |   |
| December, 2002    |   | 1.20     |   | 0.40    |   |
| March, 2003       |   | 0.72     |   | 0.32    |   |
| June, 2003        |   | 1.33     |   | 0.11    |   |
| September, 2003   |   | 1.18     |   | 0.40    |   |
| December, 2003    |   | 0.78     |   | 0.32    |   |

 

The above quotations are inter-dealerquotations without retail mark-up, mark-down or commission and may notrepresent actual transactions.  The 2002and March 2003 quotations have been adjusted to reflect the effect of a 1 for40 reverse split effective April 2003.

 

**HOLDERS**

 

The number of stockholders of record of theCompany’s common stock, the only stock outstanding, as of December 31, 2003 was2,095.

 

**DIVIDENDS**

 

The Company has not declared any dividendssince inception of operations.  Anyfuture determinations regarding the payment of dividends will depend uponresults of operations, capital requirements, the financial condition of theCompany, and such other factors that the Board of Directors of the Company mayconsider.

 

**SALESOF UNREGISTERED SECURITIES-USE OF PROCEEDS**

 

During the fourth quarter of 2003, theCompany issued 22,500 shares of common stock to a consultant for servicesrelated to public relations and valued these services at $14,625.

 

In December 2003, the Company issued 3,000shares to an officer for services related to that officer’s employment andvalued these services at $1,200.

 

On March 11, 2004, the Company entered into a$100,000 promissory note agreement with an unaffiliated creditor.  Terms of this promissory note includedproceeds of $20,000 at date of the agreement to be followed by four consecutivemonthly $20,000 installments on the 15th day of the month beginningApril 15, 2004.  The note bears aninterest rate of 12%.  As additionalconsideration, the Company issued the Creditor 1,000,000 common shares.  The Company cannot be assured that thecreditor will fulfill its commitment to fund the remaining $20,000installments.  If the creditor defaults,the common stock issued will be returned by the percentage of the default tothe $100,000 commitment.  The Companyintends to use the proceeds for general corporate purposes including a $25,000payment to the Internal Revenue Service due April 20, 2004.

 

**EQUITYCOMPENSATION PLANS**

 

On February 7, 2002 the Companyfiled with the Securities and Exchange Commission a S-8 Registration Statementwith respect to the adoption of the Company’s Stock Option and Grant Plan thatauthorized the issuance of 5,000,000 registered common shares.  1,275,000 of these 5,000,000 common shareswere subject to the reverse split that was effective April 22, 2003 therebyreducing the 1,275,000 common shares to 31,875 common shares.  The adjusted authorized common shares as aresult of the registration are 3,756,875. 275,000 of these shares were issued to an employee for services and thisemployee also exercised 750,000 options at exercises prices of $.12 (350,000shares) and $.17 (400,000 shares), respectively during 2002.  2,600,000 these shares were granted tocertain consultants for services and the former Chief Financial Officer(current principal accountant consultant) received 131,875 shares for servicesthat he provided.

 

14

----

 

On May 9, 2003, the Companyfiled a Form S-8 Registration Statement with the SEC to register 9,250,000common shares with respect to the adoption of the “2003 Directors, Officers,and Consultants Stock Option, Stock Warrant, and Stock Award Plan.”  During 2003, 6,750,000 of these shares weregranted to certain consultants for services and 50,000 shares were awarded tothe principal accountant for services in lieu of cash.  As part of this Plan, certain consultantswere awarded warrants with exercise prices ranging from $.002 to $.50 andduring 2003 1,792,000 common shares were issued in exchange for exercisedwarrants by these consultants.  TheCompany received $200,000 proceeds during 2003 as a result of these exercisesand used these proceeds for general corporate purposes.    708,000 warrants expired without exerciseduring January 2004.  150,000 commonshares under this Plan are reserved during 2004 for the principal accountantfor services to be provided during 2004 in lieu of cash.  508,000 of common shares under this Planhave not been issued or reserved for issue at this time.

 

On January 24, 2003 theCompany’s Board of Directors authorized that the Company reincorporate fromNevada to Delaware and this reincorporation to Delaware became effective April22, 2003 (Refer to note 14 of the accompanying financial statements).  As a part of this reincorporation, the Boardalso designated Company’s management, employees, certain affiliates ofmanagement and employees, and certain creditors for restricted stockcompensation awards.  In general, the purposeof these awards was to attract and retain directors, officers, management,employees and consultants by giving them a continuing interest in the Companyand to encourage creditors to continue flexible positions regarding creditterms.  The Company’s Chief FinancialOfficer elected not to participate in this award and exercised rescissionrights to redeem his Nevada common shares to the Company at $.01 pershare.   These stock compensation awardsprovided that each 400 Nevada common shares is convertible to 1 Nevada Convertible Preferred “A” share and each ofthese preferred shares is entitled to 800 Nevada shareholder votes.  The award of these Preferred Shareseffectively gave to these shareholders the majority voting control of theCompany. Each preferred share is then convertible to 800 Delaware commonshares.   As a result of these awards,the Company issued 43,409 Convertible Preferred “A” shares to shareholders inexchange for 17,363,640 Nevada common shares. On April 22, 2003, these Convertible Preferred “A” shares wereconvertible to 34,727,280 restricted Delaware common shares.  Those Nevada common shareholders not awardedConvertible Preferred “A” Shares received a reverse split whereby they receivedon April 22, 2003 one Delaware common share for each forty Nevada common sharesheld.   A consultant also received forservices 750 Convertible Preferred “A” Shares that were exchanged on April 22,2003 for 600,000 restricted Delaware common shares.

 

**Equity Compensation Plans Information**

 
| **Plan  category**                                          |   | **Number of securities to be  issued  upon exercise of outstanding  options, warrants and rights** |   | **Weighted-average excercise  price  of outstanding options,  warrants  and rights** |   | **Number of  securities  remaining available  for future issuance  under equity  compensation plans  (excluding  securities reflected**

**in cloumn (a))** |   |
|-------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                        |   | **(a)**                                                                                            |   | **(b)**                                                                              |   | **(c)**                                                                                                                                                     |   |
|                                                        |   |                                                                                               |   |                                                                                 |   |                                                                                                                                                        |   |
| Equity compensation plans approved by  security holders     |   | 858,000                                                                                            |   | $                                                                                    | .43    | (1)                                                                                                                                                         | -0-    |   |
|                                                        |   |                                                                                               |   |                                                                                 |   |                                                                                                                                                        |   |
| Equity compensation plans not approved by  security holders |   |                                                                                               |   |                                                                                 |   | -0-                                                                                                                                                         |   |
|                                                             |        |                                                                                                    |        |                                                                                      |        |                                                                                                                                                             |        |  |

 

----

(1)           Does not include 150,000 Registered Common shares to beissued to principal accountant during 2004 in lieu of cash

 

The President and Chief Executive Officer, C. Scott Sykes, Jr., hasearned a total of $530,788 of deferred compensation for services from each ofthe years 1998 to 2003.  Mr. Sykes canelect to convert all or part of this deferred compensation to common stock atexercise prices ranging from $.36 to $4.80 per share.  Deferred compensation earned by Mr. Sykes for future years alsohas a conversion privilege based on the closing bid price on the last day ofeach respective year.

** **

**ITEM 6.****MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

**BACKGROUND**

 

SureQuest Systems, Inc. believes that it isuniquely positioned in its industry because of its proprietary softwaretechnology that provides nutrition management systems and services to foodservice institutions in 46 US states and Canada. Recognizing that there willcontinue to be significant opportunities in nutrition delivery systems, theCompany developed, during the year 2001, a strategic plan to increase revenuesand become profitable by transforming the Company into a knowledge andinformation based Company, providing electronic (Internet) access to itsproducts and services. Web-enabling the most common features of our proprietarydietary software will provide to our customers: 1) user installed and selfpaced instruction; 2) reduced complexity; 3) all database information andprograms maintained by SureQuest Systems, Inc. and, 4) introduction of a lowpriced monthly service and fee arrangement. 

 

15

----

 

Concurrently, the Company continues toattempt to expand its present product and services delivery system, includingthe introduction during late 2000 of its multi-user version of its software anda low cost menu module so that its products and services will be affordable tothe entire industry.  In addition, theCompany plans to develop a clinical module that interfaces with its currentproducts.

 

The CMS product, developed by SureQuestduring 2000 and introduced during 2001, allows corporate clients the ability tomanage their menus, recipes and coordinate food purchasing from a centralizedor corporate position. The product eliminates repetitive menu and recipe datamanagement tasks at multiple facilities and streamlines this process forcorporate clients having multi-facilities and for food distributors. Inaddition, the CMS technology allows clients the opportunity to accumulate foodpurchasing data and use this technology to provide significant benefits andsavings for multiple facility operations.

 

The Company continues to believe that itsproducts and services are advanced of its competitors.  Management also believes that the Company’sproducts and services continue to be the products and services of choice.  However, customers and proposed customers,when making decisions to purchase the Company’s products and services, continueto question the Company’s ability to continue operations as a going concern dueto the financial condition of the Company.  We continue to be successful in attracting new customers, despite theseissues, but we cannot determine the extent, if any, of the loss of revenues dueto the going concern uncertainty.

 

On February 27, 2004, the Company announced throughan 8-K filing with the Securities and Exchange Commission (SEC) that the SEChas issued a Formal Order of Investigation to conduct a non-publicinvestigation of the Company and, but not limited to, its officers, directors,promoters and broker dealers for at least the period January 1, 2002 throughthe present.  The purpose of thisinvestigation is to determine whether or not violations have occurred of, amongother things, the registration, anti-fraud, periodic reporting, ownershipreporting, and books and record provisions of the federal securities laws.  Prior to the issuance of this order, theCompany has voluntarily produced certain documents to the SEC and intends tocooperate with the investigation in all respects.  This investigation is ongoing and the outcome cannot bedetermined at this time.  Also, wecannot determine the effects of this investigation to the Company’s ability toattract new revenues, retain existing customer relationships and/or managementand employees.

 

In order to sustain operations andsuccessfully implement the entire business plan strategy, the Company continuesin its attempt to obtain capital financing. THERE CAN BE NO ASSURANCE THAT ANINVESTMENT COMMITMENT WILL BE REALIZED. The Company’s financial condition, consistingof a significant working capital deficit, negative net worth, outstandingpayroll tax obligations, operating losses, and lack of meaningful revenuegrowth, all combine to deter investment. The Company must continue to increaserevenues and improve operating results to attract investment and sustainoperations.

 

16

----

 

Although operations improved over the year2002,  2003 was disappointing in termsof revenues and operating loss.  DuringOctober 2003, a significant customer, contributing approximately 28% and 20% ofthe Company’s total 2002 and 2003 revenues, respectively, terminated itscontract to receive dietary services from the Company by deciding to provideits own menu services in-house.  TheCompany will, nevertheless, continue to provide dietary services to certainfacilities of the discontinued customer that represent approximately one-fifthof the total revenues that the discontinued customer previously provided.  Revenues must significantly increase during2004 or the Company has no alternative but to consider reductions in managementand employee labor costs, which is the most significant cost to the Company todeliver its products and services.   Theoperating loss in 2003 was primarily the result of stock issues to consultants,employees, management and creditors. The net cash used in operating activities decreased in 2003 to $42,606from $81,914 in 2002.  Absent revenueincreases during 2004, the Company will continue to support its existing productsand services but additional development or enhancement of existing products andservices may be deferred because of lack of capital. There can be no assurancethat the quality of the products and services provided to its customers willnot be impaired if improvement in operating results is not realized.

 

The Company decreased its net operating lossfor the year 2003 as compared to 2002 from $934,458 in 2002 to $790,481 in2003.  The Company has incurredsignificant losses during each of the past seven years, and as of December 31,2003, has an accumulated deficit of approximately $8.7 million.  The primary reason for these operatinglosses during 2002 is non-cash activity comprising the issuance of stock based compensationto consultants and employees of $239,447, unrealized loss on land held for saleof $127,300 and amortization of software of $293,585 and during 2003 theissuance of stock based compensation to consultants, creditors, management andemployees of $523,865 and amortization of software of $134,561.  Management remains confident that thesenegative operating results will reverse. During 2003, the net cash used in operations decreased from $81,914during the year 2002 to $42,606 in 2003. Among the causes for this decline, theCompany’s Chairman and President did not receive cash compensation during 2003as compared to approximately $43,000 during 2002.

 

Despite the loss of the significant customermentioned above during 2003, management projects that 2004 revenues will exceedthose of 2003.  During 2003, the Companyrealized significant software license revenue ($120,000) from a multi-facilitycustomer that also provides approximately $12,000 of recurring monthly revenuesfrom maintenance and technical support services and hard copy menus.  In addition, the Company anticipates anextension of a multi-year agreement with a Canadian food distributor during2004 that, if realized, will result in bulk license revenues of approximately$84,000.  Also, a U.S. affiliate of theCanadian food distributor  has executeda license distribution agreement with the Company.   Management projects that these relationships will providesignificant added software license and recurring monthly revenues during2004.  The realization of these revenuesis not assured and, if not realized, the Company’s revenues during 2004 may notexceed those of 2003, thereby further contributing to doubt regarding theCompany’s ability to continue as a going concern.

 

The Company’s liabilities at December 31,2003 and 2002 include an obligation to the Internal Revenue Service of $629,394and $655,672, respectively, primarily related to unpaid employee payrollwithholding taxes for certain periods in the years 1998 and 1999,  2000 and 2002.    On March 5, 2004 the Internal Revenue Service notified theCompany that the obligation,  includingpenalty and interest, is $619,843.   Inaddition, the Internal Revenue Service reserves the right to assess additionalpenalty and interest.  On March 5,2004,  the Company entered into ascheduled monthly payment agreement with the Internal Revenue Service thatprovides for an initial  payment of$25,000 on April 20, 2004 followed by monthly payments of $7,500 beginning onMay 20, 2004 through September 20, 2004. On October 20, 2004 a $32,500 installment is due followed by monthlypayments of $12,500 each month thereafter until the obligation issatisfied.   During 2001, the Companysubmitted to the Department of Treasury an offer in compromise of $300,000 payablein twenty four monthly installments of $12,500 as a proposed settlement of theentire obligation based on the financial impairment of the Company.   This proposed offer was accepted during2003 at the examiner level but was subsequently rejected because the Companydefaulted on depositing timely 2002 and 2003 payroll taxes.  The Company will submit a second offer incompromise during the second quarter of 2004 at a proposed settlement amountsimilar to the previous submission.  Ifaccepted by the Department of Treasury, this compromise will supersede thecurrent monthly installment settlement agreement in place.   There can be no assurance that theDepartment of Treasury will accept the proposed offer.   In addition, the Company may not be in afinancial position to comply with the monthly installment settlement agreementin force without imminent revenue growth and/or new debt financing.   The Company may have to significantlyreduce services that in turn may significantly reduce future revenues and impairexisting marketing relationships.  TheInternal Revenue Service has filed a Notice of Federal Tax Lien thatestablished a security interest in all assets of the Company.  The Company is current with 2003 and 2004payroll tax obligations and must remain current to maintain its settlement agreementand to file the proposed offer in compromise.

 

During 2003, the Company sustained operationsprimarily through proceeds ($200,000) from the exercise of warrants, advances($31,793) from a certain officer and the deferment of salary ($100,000) to theCompany’s Chief Executive Officer.  Inaddition, the Company’s former Chief Financial Officer currently serving theCompany in a Principal Accountant consultant capacity, is receiving Companycommon stock for his services in lieu of cash compensation.  It cannot be determined whether the Companywill be able to retain the services of these individuals without cashcompensation.  In addition, the Companymay not be in a position during 2004 to attract additional capital from equityinstruments such as warrants and options. The Company must demonstrate to proposed investors

 

17

----

 

that its operating results and negative networth will significantly improve and that it can meet its current debtobligations.   If successful inattracting new capital, the current shareholders may experience significantdilution to secure this capital.  OnMarch 11, 2004, the Company did secure $20,000 of capital through debtfinancing and a non-binding commitment for an additional $80,000 debt financingpayable in monthly installments of $20,000 beginning April 2004.  The Company issued 1,000,000 shares of theCompany’s restricted common stock as additional consideration for thisfinancing.  If the Company does notreceive the remaining $80,000 financing, the creditor is obligated to return apro-rata number of shares.  The Companywill use the proceeds from this debt financing, to the extent available, toconsolidate debt, meet monthly payroll tax installments, contribute to the paymentof legal fees on behalf of the Company, Directors and perhaps others, incurredwith the Securities and Exchange Commission investigation, continue the Companyas a fully reporting public Company and to develop a dietary clinical moduleproduct.  Without this remainingfunding, the Company may not be able to meet one or more of these obligations.

 

The Company has a significant amount of debtoutstanding and may need to access additional debt financing and/or restructurethe timing of its required principal and interest payments. At December 31,2003, the Company had $1,326,880 of current liabilities, primarily to theInternal Revenue Service and accrued interest to related parties. While theInternal Revenue Service and accrued interest to related parties obligationstotaling $979,940 are classified as current, the Company has reached agreementwith the creditors to defer the majority of these obligations beyond  2004. These obligations continue to be classified as current because theCompany must meet certain installment obligations to maintain the agreed upondeferments.   The total debt andnegative net worth impairs the Company’s ability to obtain additionalfinancing, requires the Company to dedicate a substantial portion of its cashflow to the payment of principal and interest, impairs our ability to reactrapidly to a change in market conditions and makes the Company more vulnerableif there is a continued downturn in general economic conditions.  A significant portion ($1,759,818) of theCompany’s total liabilities is payable to related parties and an additional$629,394 is related to payroll tax obligations for which an installmentagreement has been formalized.  TheCompany does have flexibility in addressing its obligations with relatedparties as these obligations become due but there can be no assurance that therelated parties will continue to extend maturities.

 

There can be no assurance that managementwill be successful in remedying these risks and the failure to do so would havea  material adverse effect on ourbusiness, financial condition and results of operations.  Sales and operating results generally dependon the volume and timing of orders received, which are difficult to forecastgiven the length of the sales cycle in the assisted living and nursing careindustry due to current constrained federal and state reimbursement policiesand the continued reliance by the industry on manual dietary systems.Accordingly, any significant shortfall in sales or collections would have animmediate adverse effect on the Company’s business, financial condition andresults of operations.

 

On January 24, 2003, the Company’s Board ofDirectors adopted a resolution to authorize a corporate restructuring,including granting significant stock awards and moving its state ofincorporation from Nevada to Delaware. The Board determined that thisrestructuring was in the best interests of the Company and its shareholders inorder to attract and/or retain directors, management, employees andconsultants, because of the Company’s financial impairment and resultant lackof liquidity.  As a result of thisrestructuring, the Company awarded during 2003 certain shareholders,management, employees, consultants and creditors common stock, including6,750,000 registered shares issued to consultants, and recognized a $523,865charge to operations.  The Company alsoreceived $200,000 cash proceeds from the exercise of warrants issued toconsultants from which the consultants received 1,792,000 registeredshares.  The shareholders, management,employees, creditors and a certain consultant subject to these awards receivedrestricted Delaware common shares. There was significant dilution to thoseshareholders that were not awarded Nevada convertible preferred stock awards asthey received one Delaware common share for each forty Nevada common sharesheld.

 

**RESULTSOF OPERATIONS**

 

**TOTALREVENUES**

 

Revenues for the year ended December 31, 2003were $1,347,957 that represents an increase of $144,684 (12.0%) from revenuesof $1,203,273 for the year ended December 31, 2002. Dietary services andsupplies revenues decreased to $566,607 for the year ended December 31, 2003from $567,865 for the year ended December 31, 2002 which represents a 0.2%decrease. Software sales and rental revenues increased to $781,350 for the yearended December 31, 2003 from $635,408 for the year ended December 31, 2002which represents a 23.0% increase.

 

Dietary services and supplies revenuesdecreased $1,258 for the year ended December 31, 2003 over the same period inthe prior year primarily due to a decrease of menu and forms revenues of$20,196 and an increase of $20,221 in hard copy menus.  A significant customer representingapproximately one half of the dietary services and supplies revenues terminatedits contract with the Company effective October 2003 by bringing these servicesin-house.  In addition, the Companyprovides hard copy menu services to approximately 200 facilities that representone multi-facility customer.  Thesefacilities are pending installation of the Company’s software at which time thehard copy menu services will terminate. Once installed, these facilities are charged a recurring monthlymaintenance fee that is equal to the hard copy menu fee.  Dietary services and supplies revenues areprojected to decrease during 2004 as compared to 2003 and will continue todecrease as customers automate to our dietary software products andservices.     The

 

18

----

 

software sales and rental revenues increasedduring the year ended December 31, 2003 by $145,942 from the same period in2002 primarily because of a $120,000 multi-facility license sale during 2003,an increase in support revenues of $34,762 and an increase in data basemanagement services of $9,803.    2003DOS revenues continue to decrease and were $19,611 less than in 2002.  Management projects that revenues willincrease during 2004 over the same period in 2003 because of an extension of acontract with a Canadian food distributor that will include multi-licenserevenues at renewal and the advent of a U.S. relationship with an affiliate ofthe Canadian food distributor that will also include multi-license sales.  In addition to the projected increase insoftware sales from these customers, there will also be increased maintenanceand support revenues as a result of these added software installations.  There can be no assurance that theseprojected events will result in additional revenues to the Company.  The Company has also increased its directsales staffing and presently has four active members involved in the marketingof the Company’s products and services as compared to two active staff membersduring 2003.  A third member was addedin October 2003 and a fourth in March 2004.

 

19

----

 

**COSTOF REVENUES**

 

Total cost of revenues increased to $694,867for the year ended December 31, 2003 which represents a 3.1% increase over costof revenues of $674,070 for the year ended December 31, 2002.  The Company’s gross profit of $653,090(48.5% gross profit margin) for the year ended December 31, 2003 is a 4.5%gross profit margin increase over the gross profit of $529,203 (44.0% grossprofit margin) during the year ended December 31, 2002.

 

Dietary services and supplies cost ofrevenues for the year ended December 31, 2003 of $260,991 increased from$199,533 for the year ended December 31, 2002 which represents a 30.8%increase. Software sales and rental cost of revenues for the year endedDecember 31, 2003 of $433,876 decreased 8.6% from $474,537 during the yearended December 31, 2002. The gross profit margin of dietary services andsupplies of $305,616 and gross profit margin of 53.9% during the year endedDecember 31, 2003 decreased from $368,332 and gross profit margin of 64.9%during the year ended December 31, 2002. The gross profit margin of softwaresales and rental of $347,474 and gross profit margin of 44.5% for the yearended December 31, 2003 increased from $160,871 and gross profit margin of 25.3%during the year ended December 31, 2002.

 

The dietary services and supplies cost ofrevenues increase of $61,458 during the year ended December 31, 2003 from thesame period during 2002 is primarily attributable to an increase of $33,927 indietary wages related to a new position and an increase of $19,761 related tocosts associated with hard copy menus shipped to approximately 210facilities.  The software sales andrental cost of revenues decrease during the year ended December 31, 2003 of$40,661 from the same period during 2002 is primarily attributable to thecompletion of amortization of software during June 2003 that reduced the 2003amortization expense $159,026 as compared to 2002, offset by an increase insalaries of $59,995 with the addition of staffing, an increase in programmingcosts of $16,000 and an increase in the cost of software installation andtraining of $28,576.  Expenses relatedto software sales will continue to increase due to expansion of the number ofactive installations and the conversion to first tier support for all Canadianfacilities.

 

**SALESAND MARKETING EXPENSES**

 

For the year ended December 31, 2003, salesand marketing expenses were $117,464 or 8.7% of revenue, an increase from$53,917 or 4.5% of revenue for the year ended December 31, 2002.  The increase of $63,547 in expense duringthe year ended December 31, 2003 is primarily due to compensation paid to anadditional employee of $44,532 and an increase in trade show expense of$9,627.    The Company’s primary marketingrepresentatives are network alliance relationships, primarily in the foodservice industry.  The Company has addedtwo additional direct sales employees. The employees began their respective employment with the Company inOctober 2003 and March 2004.  Theemployee that began his employment in October 2003 replaces the formermarketing consultant and officer of the Company.

 

**GENERALAND ADMINISTRATIVE EXPENSES**

 

During the years 2003 and 2002, the Companyincurred stock based compensation expenses related to consulting services.  The Board of Directors determined during2001 that the Company needed to bring outside resources to assist the Companyin marketing its products, develop its business plan, and identification ofinterest in a registration offering.  Inaddition, during 2002, an employee affiliate of these consultants assisted theCompany in adopting a stock based compensation plan for the Company’s employeesand management in order to retain their services through stock basedcompensation.  The Company does not havethe financial resources to compensate its management and certain employees withcash in accordance with industry standards and therefore must rely on otherincentives for retention.  The Company incurredfor the years ended December 31, 2003 and 2002 net losses from operations of$556,489 and $688,771.  Stock basedcompensation contributed $460,661 and $239,447 to these 2003 and 2002 netlosses from operations of which $415,605 and $219,742, respectively wereclassified as general and administrative expenses.

 

For the year ended December 31, 2003, generaland administrative expenses were $1,073,776 or 79.7% of revenue, a decreasefrom $1,141,346 or 94.9% of revenue for the year ended December 31, 2002. TheCompany decreased its net general and administrative expenses $67,650 duringthe year 2003 that included non-cash stock compensation awards resulting fromthe Company’s reorganization to Delaware on April 22, 2003.   This net decrease includes an increaseof  $201,230 in officer salaries ofwhich $263,372 related to stock awards to the Chief Executive Officer andSenior Vice President and a decrease of $38,781 due to the resignation of theCompany’s Chief Financial Officer; increase of $3,123 in utility expense as aresult of office sublease;  increase of$38,781 in accounting services as a result of the Chief Financial Officer’sreclassification from an officer to an accounting consultant;  $11,625 increase in auditing services as aresult of the Company’s reorganiziation and related increased SEC filings;$3,621 increase in stock fees due to stock transfer activity related to theCompany’s reorganization; $7,842 increase in business property taxes as aresult of the Company’s sale of land held for investment; and a $2,322 increasein maintenance and repair of equipment and 2003 decreases of  $204,850 primarily related to reduced stockbased compensation expenses related to consultant activity;  $56,755 decrease as a result of thetermination of the Company’s business consultant in February 2003; $14,208decrease in office rent due to renegotiated reduced office rent and thesublease of office space;

 

20

----

 

$12,545 decrease in health insurance benefitsas a result of the termination of the Company’s business consultant in February2003; $6,266 decrease in bad debt expense; $6,436 decrease in telephoneexpenses due to a new provider contract at a lower use rate; $22,445 decreasein legal expenses due to $36,522 expenses incurred during 2002 primarilyrelated to a sublease tenant; and a $7,764 reduction in travel expensesprimarily related to consultant activity in 2002.  Management projects that 2004 general and administrative expensewill be significantly reduced during 2004 due to reduced reliance on consultantactivity.  Legal expenses, includingproviding legal services to the Company and its directors and officers, willsignificantly increase in 2004 due to the ongoing Securities and Exchangenon-public investigation of the Company’s activities during 2002, 2003 and2004.  It may be necessary tosignificantly reduce or eliminate the Company’s health insurance benefits, ifthe Company does not secure additional liquidity from revenues or debtfinancing.  In addition, the Company mayelect to discontinue being fully reporting with the SEC due to the expenserequired to report, including but not limited to audit expenses, preparation offilings using outside services and related stock transfer activity.  It cannot be determined at this time whateffect, if any, the termination of these activities and benefits may have onthe Company and its management and employee retention.

 

At this time, the Company intends to continueas a fully reporting public company and is committed to providing healthinsurance benefits to its employees.

 

**DEPRECIATIONAND AMORTIZATION**

 

For the year ended December 31, 2003,depreciation and amortization expenses were $18,339 which is a decrease from$22,711 for the year ended December 31, 2002. The decrease of $4,372 during2003 is primarily due to the completed amortization of leasehold improvements.

 

**INTERESTEXPENSE**

 

For the year ended December 31, 2003 interestexpense was $200,206 which is an increase from $140,855 for the year endedDecember 31, 2002. The increase of $59,351 during the year 2003 as compared tothe year 2002 is primarily attributable to stock  awards valued at $60,699 to certain lenders as a result of theCompany’s reorganization on April 22, 2003.

 

21

----

 

**GAINFROM DEBT SETTLEMENT**

 

During the year 2002, the Companysuccessfully negotiated a settlement of an outstanding creditor obligation thatreduced the recorded obligation by $30,294.

 

**UNREALIZEDLOSS - INVESTMENT IN LAND**

 

For the year ended December 31, 2002, theCompany recorded a permanent dimunition of $127,300 in the carrying cost of theland held for investment to reflect the Company’s asking sales price of$150,000, net of broker commissions and recognized an additional $22,483reduction during the year 2003.  TheCompany negotiated a sale of the land during 2003.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Absent significant revenue increases during2004, the Company requires additional capital to maintain ongoing operationsand meet its creditor obligations, including payroll tax obligations.  Net cash used in operating activities during2003 was $42,606 which is an improvement from the $81,914 net cash used inoperating activities during 2002. During 2003 the Company benefited from $200,000 proceeds from the exerciseof warrants and received $31,793 in net advances from its Chief ExecutiveOfficer.  The Company does notanticipate additional liquidity from these sources during 2004.  On March 11, 2004 the Company secured$20,000 debt financing from an unaffiliated creditor with a commitment of anadditional $80,000 in four monthly installments beginning April 2004.  Repayment terms include 12% interest withmonthly principal and interest payments of $1,029 that begin September 2004through August 2013 at which time the remaining principal balance of $93,419 isdue.   As additional consideration, theCompany issued 1,000,000 restricted common shares to the creditor.  The Company cannot be assured that theadditional $80,000 will be funded. Should the creditor default, the pro-rata shares issued will be returnedand the scheduled monthly payments and balloon payment will be reducedaccordingly.  The Company also pledgedroyalty payments from revenues of a proposed clinical module product, ifdeveloped, for the term of the outstanding obligation.   The Company continues to receive a goingconcern opinion from its auditors regarding the Company’s ability to sustainoperations during 2004 because of its financial condition.

 

The Securities and Exchange Commission (SEC)has issued a Formal Order of Investigation to conduct a non-publicinvestigation of the Company and but not limited to its officers, directors,promoters and broker dealers for at least the period from January 1, 2002through the present.  The Company hasvoluntarily produced all documents requested by the SEC to date and intends tocooperate fully with this investigation in all respects.  The outcome of this investigation cannot bedetermined at this time.  The Company onFebruary 27, 2004 announced this investigation through an 8-K filing.  As a result of this investigation, theCompany will incur significant legal fees to provide advice to the Company andits officers and directors.  It can notbe determined what the impact of this investigation will have on the Company’sbusiness relationships.  However, it ismanagement’s belief that a contractual relationship related to a significantproposed business opportunity has been terminated due to this investigation.  At this time, the Company is not aware ofany other affected current business relationships.

 

At December, 31, 2003 the Company’s totalliabilities of $2,937,852 (a decrease of $3,501 over 2002) exceed its totalassets of $434,142. The Company’s significant income producing asset, itsproprietary dietary software, has been fully amortized at June 2003, andaccordingly, has no carrying value in accordance with generally acceptedaccounting principles.  In addition, theCompany’s current liabilities at December 31, 2003 of $1,326,880 (a decrease of$37,014 from 2002) exceed current assets of $290,210 or a working capitaldeficit of $1,036,670.  This workingcapital deficit is primarily comprised of payroll tax obligations of $629,394and accrued interest of $350,546. During 2004, the Company has reached asettlement agreement with the Internal Revenue Service, terms of which includemonthly installment payments (see reference to the terms of this settlementagreement below) and the accrued interest primarily consists of related party debt.  During 2003, one of these related parties agreed to extendpayment terms that require $3,000 monthly payments.   In addition the Company has sold its land held for investmentand received a $112,045 long term note receivable, terms of which includeannual interest and principal payments of $11,205 beginning August 2004.  The Company has assigned these payments to abank creditor obligation of $85,000. The bank retains a lien on the land until the obligation to the bank hasbeen repaid.

 

The Company has sustained operating lossesfor each of the past six years and has at December 31, 2003 an accumulateddeficit of $8,721,001. The Company has financed its operations primarilythrough debt financing provided by shareholders, officers and affiliates andfailed to remit payroll tax obligations for certain periods during the years1998, 1999, 2000 and 2002. The Company is in compliance with 2003 and 2004payroll tax deposits.  At December 31,2003 the Company has recorded payroll tax obligations of $629,394.  On March 5, 2004, the Internal RevenueService (IRS) advised  that the totalobligation outstanding, including penalties and interest, is $619,843.  In addition, the IRS advised that there maybe additional penalties and interest assessed in the future towards thisobligation.    On March 5, 2004, the IRSapproved a settlement installment agreement that provides for an initialpayment of $25,000 on April 20, 2004 followed by monthly payments of $7,500beginning May 2004 through September 2004. On October 24, 2004, an additional $32,500 installment is due followedby $12,000 monthly payments beginning on October 20, 2004 and each

 

22

----

 

month thereafter until the obligation is paidin full.  The Company intends to file anoffer in compromise during the second quarter of 2004 that proposes to reducethe total obligation to an estimated $300,000, payable in 24 equal monthlyinstallments.  The Company previouslyfiled an offer in compromise for that amount and the offer was accepted at thefield examiner level but subsequently denied because the Company failed toremit timely payroll tax deposits during 2002. The Company believes that this offer in compromise will be acceptedbased on prior IRS determinations. However, there can be no assurance that the IRS will approve theoffer.  In addition, the Company must bein full compliance with its payroll tax deposits and settlement agreementinstallment payments.  There can be noassurance that the Company will have the financial resources to meet theseinstallment obligations in a timely manner. The IRS maintains a security interest in all assets of the Company.  Should the Company default in remittingthese payment obligations, there can be no assurance that the IRS will allowthe Company to continue as a going concern.

 

During the year 2003, the Company decreasedits total liabilities $3,501from its total liabilities at December 31,2002.   This reduction is primarily aresult of a decrease at December 31, 2003 of the following obligations ascompared to December 31, 2002: convertible debentures decreased due to paymentsof $4,526 ; notes payable to officers, shareholders and affiliates decreaseddue to payments of $75,036;  long-termand credit lines decreased due to payments of $48,108;  accounts payable-trade decreased due topayments of $51,594, included in these payments were $35,427 of property taxesin arrears of which the Company received $15,488 from the buyer of the landheld for investment ; and payroll tax obligations decreased $26,278 primarilydue to payments for 2001 and 2002 payroll tax obligations; increases inliabilities at December 31, 2003 as compared to December 31, 2002 related toaccrued expenses increased $21,357 primarily as a result of a $24,755 provisionrelated to deferred revenues on software license sales and support fees paid inadvance of services provided; accrued interest increased $48,891 primarily dueto an annual $50,000 accrued interest provision for a related party obligationof $500,000; net advances from officers and affiliates increased $31,793 andthe Company continued its annual deferred compensation provision of $100,000 toits Chief Executive Officer in lieu of cash compensation.

 

Total assets at December 31, 2003 of $434,142decreased $90,568 from the total assets of $524,710 at December 31, 2002. Thisdecrease, as compared to 2002 balances, is primarily due to an increase of cashof $59,472 resulting from  proceeds of$200,000 in the exercise of warrants during the third and fourth quarters of 2003;  increase in accounts receivable trade of$21,699 resulting primarily from a $18,650 trade receivable due on aninstallment sale that provides for semi-annual payments that end in April 2004;  increase in notes receivable of $110,362 dueto the Company’s assumption of a $112,045 note receivable on the sale of landheld for investment; increase in prepaid expenses and other current assets of$12,148 primarily due to $3,008 accrued interest receivable related to the notereceivable from the sale of land held for investment; and decreases of $134,561related to the final amortization provision of capitalized software developmentcosts related to the Company’s proprietary dietary software; $150,000 decreaserelated to the Company’s sale of land held for investment that included a$22,467 realized loss provision during 2003 and $9,688 decrease in property andequipment related to a $18,339 depreciation provision and $8,651 purchases ofnew equipment.  The Company intends todevelop during 2004 a clinical dietary module as a segment of its dietarysoftware products.

 

The Company’s 2003 net cash used in operatingactivities decreased $39,308 from a $81,914 cash used for the year endedDecember 31, 2002 to a cash used of $42,606 for the year ended December 31, 2003.The Company’s net loss from operations of $790,481 for the year ended December31, 2003 decreased $143,977 as compared to the net loss from operations of$934,458 for the year ended December 31, 2002.   During the year 2003, non cash items charged to operations weredepreciation and amortization of $152,900 as compared to $316,296 during2002;  2003 provision for bad debt of$6,367 as compared to $12,633 during 2002, 2003 common stock issued foremployee compensation of $312,200 that includes common stock awards of $277,775on April 22, 2003 related to the Company’s reorganization from Nevada toDelaware as compared to $19,705 during 2002; 2003 common stock issued for services of $140,461 related to theengagement of consultants as compared to $219,742 during 2002; 2003 commonstock issued in conjunction with debt of $63,204 of which $60,699 related tocommon stock awards to certain creditors as part of the Company’sreorganization from Nevada to Delaware on April 22, 2003 as compared to $0during 2002.    Additional cash flowsfrom operations were: 2003 accounts receivable - trade increased $28,066 ascompared to a $27,504 decrease in 2002; 2003 prepaid expenses and other currentassets increased $22,034 as compared to a $2,684 increase in 2002; accountspayable - trade decreased $51,594 as compared to a $19,283 decrease in 2002;2003 payroll tax obligations decreased $26,278 as compared to a $56,069increase in 2002 due to unremitted 2002 payroll tax obligations;  2003 accrued expenses increased $21,357 ascompared to a $22,267 decrease in 2002; 2003 accrued interest increased $48,891as compared to a $60,608 increase in 2002; and 2003 deferred compensationincreased $100,000 as compared to a $56,921 increase during 2002 (the ChiefExecutive Officer received cash compensation for a portion of 2002).  Cash flows from investing activities for theyear ended December 31, 2003 were $6,837 that included $8,651 purchases ofproperty and equipment and $15,488 net proceeds from the sale of land held forinvestment.  Cash flows used ininvesting activities during 2002 was $5,424 in the purchase of property andequipment.  Cash flows provided byfinancing activities decreased to $95,241 for the year ended December 31, 2003as compared to $96,133 for the year ended December 31, 2002. During the year2003,  the Company received $31,793 netproceeds in advances from officers and affiliates as compared to $7,816 during2002;  remitted payments on convertibledebentures of $4,526 as compared to $1,805 during 2002 and also during 2002received proceeds of $20,932 from convertible debentures issue; remittedpayments on notes payable to officers, shareholders and affiliates of $75,036as compared to $83,723 during 2002 and also during 2002 received $25,000proceeds from notes payable issues to officers, shareholders andaffiliates;  remitted payments on creditlines and long-term debt of $48,108 as compared to $30,087 during 2002 and alsoreceived during 2002 $50,000 proceeds from credit lines and long-term debt;received proceeds of $200,000 from warrants exercised as

 

23

----

 

compared to $108,000 proceeds realized fromthe exercise of stock options during 2002; remitted $8,863 to two shareholders,including the former Chief Financial Officer in the exercise of stockrescission rights related to the Company’s reorganization from Nevada toDelaware on April 22, 2003;  received$19 from the purchase of common stock as treasury and then canceled.  As a result of these cash flow transactions,the Company increased its cash for the year ended December 31, 2003 $59,472 ascompared to an increase of $8,795 during 2002.

 

**CONTRACTUALOBLIGATIONS**

 

The following table summarizes the Company’scontractual obligations at December 31, 2003:

 
| **Contractual obligations** |   | **Total** |      | **Payments  due by period  Less than  1 year** |   | **1-3 years** |   | **3-5 years** |    | **More than  5 years** |    |
|-----------------------------|--------|-----------|-----------|------------------------------------------------|--------|---------------|--------|---------------|---------|------------------------|---------|
|                        |   |      |      |                                           |   |          |   |          |    |                   |    |
| Long-Term Debt Obligations  |   | $         | 1,202,246 |                                           | $      | 122,062       |   | $             | 576,277 |                   | $       | 256,911 |   | $ | 246,996 |   |
|                        |   |      |      |                                           |   |          |   |          |    |                   |    |
| Operating Lease Obligations |   | 288,479   |      | 68,319                                         |   | 131,760       |   | 88,400        |    | -0                     | -  |
|                        |   |      |      |                                           |   |          |   |          |    |                   |    |
| Total                       |   | $         | 1,490,725 |                                           | $      | 190,381       |   | $             | 708,037 |                   | $       | 345,311 |   | $ | 246,996 |   |

 

In addition, the Company is obligated to itsChief Executive Officer $530,788 in deferred compensation.  The Company classifies this obligation aslong term because the Company cannot determine when it will be in a position toredeem this obligation.

 

Included in the Long-Term Debt Obligationsschedule of “1-3 years payments” of $576,277 is $500,000 of principal owed toan affiliate of the Company’s Chief Executive Officer.  Although this obligation has matured, theaffiliate continues to extend the maturity date each year.  It cannot be assured that the affiliate willcontinue to extend the maturity beyond the current January 1, 2005 maturitydate.  There is also accrued interest of$253,425 at December 31, 2003 related to this obligation.  There have been no payments by the Companytowards this note since the inception date of June 1998.

 

The Company also is liable for approximately$620,000 of payroll tax obligations related to certain periods in years 1998,1999, 2000 and 2002.  The Company hasentered into an installment redemption agreement with the Internal RevenueService whereby the Company will begin to remit monthly installments beginningApril 20, 2004 of $25,000 followed by $7,500 on May 20, 2004 and each monththereafter with a $32,500 installment due October 20, 2004 followed by monthlyinstallments of $12,000.  Accruedinterest and penalties will continue to accrue until the obligation is paid infull.  This obligation is not reflectedin the above schedule because the Company plans to file an offer in compromiseduring the second quarter of 2004 in order to significantly reduce thisobligation, including interest and penalties, to an approximate $300,000.  The Company will offer equal 24 monthlyinstallments to redeem the offer in compromise, if accepted.   The success of this offer cannot bedetermined and, if rejected by the Internal Revenue Service, the Company mustcontinue to abide by the monthly installment agreement cited above.

 

24

----

 

The Company has historically financed itsoperations primarily through debt financing provided by shareholders, officersand affiliates, deferment of payment of payroll tax obligations, proceeds fromthe exercise of warrants and stock options, deferred compensation to its ChiefExecutive Officer in lieu of cash and the extension of related party debtmaturities. The Company’s ability to sustain operations may be dependent uponadditional debt financing and/or significant increases in revenues. The Companyhas limited cash and credit available and may not be able to raise additionalfinancing or establish lines of credit. Additional shareholder, officer andaffiliates debt financing also may not be available.  The Company is  reliant onalliances with three major customers that represent during 2003 44% of theCompany’s revenues and 23% during 2002. The termination of any one of theserelationships or a significant reduction by these customers in purchasing theCompany’s products and services will have a substantial immediate liquidityeffect on the Company’s business.  TheCompany is currently negotiating with one of these customers to extend a fiveyear contract that expired during 2003. The Company continues to provide products and services to this customer.

 

Without additional financing and/orincreasing revenues, management does not believe that the Company can continueto sustain operations. The Company may have to reduce salaries and/or suspendproviding certain employee benefits, primarily health insurance, in order tomeet its other operating obligations. This action, if taken, may result in theloss of certain key employees. It can not be determined whether the loss of anyemployees can be replaced in a timely manner in order not to disrupt business.The Company believes that 2004 revenues will increase over those of 2003, butthis increase, if realized, may not be sufficient to meet the Company’soutstanding obligations, including payroll tax obligations.  In addition, the effect of the Securitiesand Exchange Commission’s investigation on the disruption of current andproposed customer relationships cannot be determined at this time.  Accordingly, the Company’s auditor continuesto issue a going concern opinion regarding the ability of the Company tocontinue to sustain operations.

 

**ITEM 7.****FINANCIALSTATEMENTS (See Attached)**

 

**ITEM 8****. CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

The Company has engaged  KBA Group LLP as its auditors.   This firm is the result of a merger of twoaccounting firms, one of which was the Company’s former auditor, King Griffin& Adamson P.C.  The Company filed an8-K on March 7, 2003 as notification of this change, which was due to theaccountant’s name change.

 

**ITEM 8A****.  CONTROL AND PROCEDURES**

 

The Company’s management, including theCompany’s chief executive officer and principal accountant, has evaluated theeffectiveness of the Company’s disclosure controls and procedures as of theyear December 31, 2003, the period covered by the Annual Report on Form10-KSB.  Based upon that evaluation, theCompany’s chief executive officer and principal accountant have concluded thatthe disclosure controls and procedures were effective as of December 31, 2003to provide reasonable assurance that material information relating to theCompany is made known to management.

 

During April 2004, the Company adopted aformal written instruction notification policy regarding the issuance of stockby its transfer agent and is retaining this written notification as a record ofauthority.  Prior to this writtennotification policy, the transfer agent accepted verbal notification.

 

**PARTIII**

 

**ITEM 9****. DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The Company’s Executive Officers, Directorsand Significant Management Consultants are as follows:

 

C. Scott Sykes, Jr. 64, Chairman of the Boardand President, has over 30 years experience in the health care industry. Mr.Sykes became associated with the Company when, in January 1998, he bought acontrolling interest in the Company from the two co-founders. From 1994 until1999, Mr. Sykes was “of counsel” to the Chicago law firm of Gardner Carton andDouglas. From 1989 to 1994, Mr. Sykes was Senior Vice President and GeneralCounsel of VHA, Inc., Irving, Texas, one of the country’s largest healthcareorganizations. Mr. Sykes graduated from The University of Virginia in 1962 witha B.A. and from that same University in 1965 with a LLB degree. Mr. Sykes isthe largest shareholder in SureQuest Systems, Inc.

 

Stan Janczyk 57, Principal Accountant, wasappointed Chief Financial Officer and Treasurer of the Company in March 2000.He was also appointed Secretary in 2003. Mr. Janczyk resigned as an Officer of the Company on October 1, 2003 butremains as a consultant to assist the Company with its accounting, reportingand tax requirements.  Assisting theCompany with these responsibilities is his primary relationship, but he doesconsult with other unrelated companies.   Prior to these Company positions, he maintained a financial consultingand tax practice, including serving as a consulting Chief Financial Officer tothe Company from 1998 to March 2000. He was President of a closely heldmarketing company in Dallas, Texas, serving in that capacity from 1995 to 

 

25

----

 

2000. From 1993 to 1995, he served asPresident of International Insurance Services, a multi-state insurancebrokerage company in Dallas, Texas. From 1990 to 1993, Mr. Janczyk served as afinancial consultant, specializing in the insurance industry. From 1980 to1989, he was involved as a financial officer in the life and health insuranceindustry. He received his Certified Public Accountant certificate in Illinoisin 1976, having served as manager with the firm of Grant Thornton in Chicago,Illinois and Oklahoma City, Oklahoma from 1974 to 1979. He graduated fromIndiana University in 1974, receiving a B.S. in Business.

 

Alma Sudderth 48, Director and Senior VicePresident, began her term as a Director in 1991. Ms. Sudderth is one of theco-founders of the Company. She has been employed by the Company since 1989 andserved as a vice president until January 1998 when Mrs. Sudderth was namedPresident of the SureQuest Systems Inc., a Texas corporation and predecessor tothe Company. From January

 

2000 to the present, Ms. Sudderth serves asan Industry Market Leader for the Company and heads the sales/marketingdivision, and is responsible for several of the Company’s significant strategicalliances. From February 1989 until January 1998, Ms. Sudderth was an ExecutiveVice-President of the Company. Ms. Sudderth is a Registered Dietitian. Shegraduated from the University of Tennessee in 1977 with a BS, majoring inDietetics and in 1978 with a Masters of Science, majoring in Food Science.

 

Late Filings

 

The Company’s Chief ExecutiveOfficer and Chairman, C. Scott Sykes, Jr. submitted a late Form 4 filing withthe Securities and Exchange Commission on August 5, 2003 that was due on June30, 2003.  This Form 4 filing containedeleven reported transactions.

 

Mr. Sykes also has notsubmitted a Form 13 (d) filing that was due during the year 2000.  Mr. Sykes has not at this time determined thedate that he will submit this Form to the Securities and Exchange Commissionand also cannot at this time determine the number of reportable transactionsthat this report will include.  Mr.Sykes is retrieving records necessary to compile the required information andprojects that this Form 13 (d) will be filed during the second quarter of 2004.

 

Effective March 30, 2004 the Board ofDirectors adopted a Code of Ethics and Business Conduct that applies to among otherpersons, the Company’s Chief Executive Officer, Senior Vice President andPrincipal Accountant, as well as persons performing similar functions.  As adopted this Code sets forth writtenstandards that are designed to deter wrongdoing and to promote:

 

1)              honest and ethicalconduct, including the ethical handling of actual or apparent conflicts ofinterest between personal and professional relationships;

2)              full, fair,accurate, timely and understandable disclosure in reports and documents thatthe Company files with, or submits to, the Securities and Exchange Commissionand in other public communications made by us;

3)              compliance withapplicable governmental laws, rules and regulations;

4)              the prompt internalreporting of violations of the Code of Ethics and Business Conduct to anappropriate person or persons identified in the Code, and

5)              accountability foradherence to the Code of Ethics and Business Conduct.

 

This Code requires, among other things, thatall of the Company’s personnel shall be accorded full access to our ChiefExecutive Officer with respect to any matter which may arise relating to thisCode.

 

This Code of Ethics and Business Conduct isfiled herewith with the Securities and Exchange Commission as Exhibit 14.1 tothis annual report.

 

We will provide a copy of the Code of Ethicsand Business Conduct to any person, without charge, upon request to thefollowing address:

 

SureQuest Systems, Inc.

Attn: Code Request

13606 T.I. Blvd.

Dallas, TX.  75243

 

To date, there have been no waivers under theCode.  The Company will post anywaivers, if and when granted, of the Code of Business Conduct and Ethics on ourwebsite at www.surequest.com.

 

26

----

 

**ITEM 10****. EXECUTIVECOMPENSATION**

 

The following table sets forth thecompensation paid to certain executive officers of the registrant for the threeyears ended December 31, 2003. Directors are not paid or reimbursed forattending meetings, other than out of pocket travel costs.

 

**SUMMARYCOMPENSATION TABLE**

 
|                            |   |             |   |           |   | **LONG TERM**        |   |             |   |
|---------------------------------|--------|------------------|--------|----------------|--------|----------------------|--------|------------------|--------|
|                            |   |             |   |           |   | **COMPENSATION**     |   |             |   |
|                            |   | **ANNUAL**       |   | **AWARDS**     |   |                 |   |
|                            |   | **COMPENSATION** |   | **RESTRICTED** |   | **ALL OTHER  (1)**   |   |
| **NAME AND PRINCIPAL POSITION** |   | **YEAR**         |   | **SALARY**     |   | **STOCK  AWARD (1)** |   | **COMPENSATION** |   |
| C. Scott Sykes, Jr.,            |   | 2003             |   | $              | -0     | -                    | $      | 255,684          |   | $ | 100,000 |   |
| Chairman and President          |   | 2002             |   | $              | 39,998 |                 | 0      |             | 56,921 |   |
|                            |   | 2001             |   | 31,015         |   | 0                    |   | 68,985           |   |
|                                 |        |                  |        |                |        |                      |        |                  |        |  |  |  |

 

----

(1) On December 31, 1998 the stockholders ofthe Company approved an annual salary of $100,000 for Mr. Sykes, all of whichwas deferred for 2003.  He is permittedto convert his deferred compensation balance into common stock of the Companyat a conversion price equal to the closing price of the stock at the lastbusiness day of the year in which the salary was due. As of December 31, 2003,Mr. Sykes has the right to convert the total amount of deferred compensationoutstanding of $530,788 to 659,505 common shares.  During August 2001, the Company began to compensate Mr. Sykes amonthly cash stipend of $6,666 that was terminated July 1, 2002 at which timehe resumed his $8,333 monthly deferred compensation. In addition to thedeferred compensation, during 2003, the Company awarded Mr. Sykes andaffiliates 25,568,423 restricted Company common shares on April 22, 2003 asrelated to the Company’s stock award plan for certain of the Company’smanagement, employees, creditors and affiliates of same.  This share award is valued at $255,684 ofwhich $244,952 is classified as officer salary and $10,732 as interest.

 

**ITEM 11****. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 
| **BENEFICIAL OWNER**                  |   | **NUMBER OF  SHARES OWNED** |   | **%  OUTSTANDING** |   |
|---------------------------------------|--------|-----------------------------|--------|--------------------|--------|
|                                  |   |                        |   |               |   |
| C. Scott Sykes, Jr.(1)                |   | 18,686,794                  |   | 41.9               | %      |
| Charles S. Sykes Irrevocable Trust(1) |   | 1,100,000                   |   | 2.5                | %      |
| Estate of Lois F. Sykes(1)            |   | 5,105,280                   |   | 11.5               | %      |
| Alma Sudderth(2)                      |   | 2,157,708                   |   | 4.8                | %      |
|                                  |   |                        |   |               |   |
| Public Ownership                      |   | 17,507,440                  |   | 39.3               | %      |
| As of December 31, 2003: TOTAL        |   | 44,557,222                  |   | 100.00             | %      |

 

----

(1) Mr. Sykes owns directly 2,921,096 sharesof the Company’s common stock and indirectly 15,765,698 shares through VIG Holdings,LLC, a limited liability company, which as sole member, he beneficiallycontrols. The Charles S. Sykes Irrevocable Trust was initiated by Mr. Sykes’father’s Trust and is controlled by his mother, Kate F. Sykes, as trustee. Allof the shares in the Estate of Lois F. Sykes are beneficially held on behalf ofthe son of C. Scott Sykes, Jr., the Company’s President.

 

(2) Number of shares reflects those owneddirectly by Mr. and Ms. Sudderth and by all their immediate family members.

 

**ITEM 12.****CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

 

**RELATEDPARTIES**

 

In June 1998 the Charles S. Sykes IrrevocableTrust loaned to the Company the sum of $500,000. The Trust was given a securedpromissory note for simple interest at the rate of ten percent (10%) per annumwith the principal and all accrued interest due at maturity on January 1, 2001.The whole amount of the note is secured by the tangible and intangible personalproperty of the Company. The Trust agreed to extend the maturity of the note toJanuary 1, 2005.  The Trust has notreceived interest or principal payments from the date of note inception.

 

Also in September 1998, C. Scott Sykes, Jr.in order to reduce the cash flow requirements of the Company, personallyguaranteed certain indebtedness in the sum of $93,056 owed to Ms. DianneLindahl, a former Company employee and a current shareholder. As of December31, 2003, the balance of the indebtedness is $9,563.

 

27

----

 

During the year 2001, the Company issued toMr. Sykes a $48,570 unsecured promissory note in exchange for $48,570. Terms ofthe note are monthly interest and principal payments of $3,488 beginningJanuary 20, 2002 with a final payment of $3,006 on March 20, 2003 and is indefault. The note bears a simple interest of 10%. The principal balance atDecember 31, 2003 is $8,842.

 

During the year 2002, the Company issued a$25,000 note bearing 12% to an affiliate of an employee in exchange for$25,000.  The principal balance atDecember 31, 2003 is $8,688.

 

Effective February 26, 2003, the Board ofDirectors authorized and awarded certain shareholders that were Companycreditors, management, employees and affiliates to convert 17,363,640 SureQuestSystems, Inc. Nevada common shares to convertible preferred  stock that in turn was convertible toCompany Delaware common shares.  As aresult of these awards, these shareholders elected to exchange 43,409convertible preferred shares for 34,727,280 Company Delaware common shares andthe Company valued these awards in the aggregate at $342,932.  Those Nevada shareholders that did notreceive the convertible preferred stock conversion rights were reversed fortyNevada common shares to one Delaware common share.  Due to this conversion privilege, the Nevada common shareholderswere diluted from a 57% controlling interest in the Nevada company to a 2%minority interest in the Delaware company.

 

**ITEM 13****. EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)          Exhibits

 

2.1 Information statement relating to thereincorporation in Delaware by the merger of SureQuest Systems, Inc. (a Nevadacorporation) into SureQuest Systems, Inc. (a Delaware corporation)

•                  incorporatedby reference to SureQuest Systems, Inc.’s current report on Form Pre14c datedMarch 3, 2003.

 

4.1 2002 Stock Option and Grant Plan

•                  incorporatedby reference to SureQuest Systems, Inc.’s current report on Form 8-K datedFebruary 21, 2002 and related S-8 filing dated February 7, 2002

 

4.2 2003 Directors, Officers and ConsultantsStock Option, Stock Warrant and Stock Award Plan

•                  incorporatedby reference to SureQuest Systems, Inc’s Form S-8 filing dated March 31, 2003

 

4.3            Changes in Control ofRegistrant

•                  incorporatedby reference to SureQuest Systems, Inc.’s Form 8-K filing dated May 7, 2003

 

14.1 Code of Ethics and Business Conduct(attachment)

 

16.1 Change in Registrant’s CertifyingAccountant

•                  incorporatedby reference to SureQuest Systems, Inc. current report on Form 8-K dated March7, 2003.

 

20.1        Press Release AnnouncingRevised Business Model

•                  incorporatedby reference to SureQuest Systems, Inc. Form 8-K filing dated June 16, 2003

 

20.2        Other Events andRegulation FD Disclosure related to a non-public Formal Order of Investigationby the Securities and Exchange Commission naming two companies, includingSureQuest Systems, Inc.

•                  incorporatedby reference to SureQuest Systems, Inc. Form 8-K filing dated February 27, 2004

 

31.1 Certification of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

31.2 Certification of Principal AccountantPursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

32.1 Certification of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

32.2 Certification of Principal AccountantPursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

(b)  Reportson Form 8-K

 

Incorporated by reference as reported in Item13 (a) above

 

28

----

 

**ITEM 14****. PRINCIPALACCOUNTANT FEES AND SERVICES**

 

(1)          Audit Fees:

 

Fees for audit services provided by KBA GroupLLP and its predecessor total $46,650 for 2003 and $35,385 for 2002, thatinclude fees associated with the annual audit, reviews of the Company’squarterly reports on Form 10-QSB, reviews of registration statements andcertain reports on Form 8-K.

 

(2)          Audit Related Fees:  None

 

The Company did not incur audit related feesduring 2003 and 2002.

 

(3)          Tax Fees:  None

 

The Company did not receive tax services nordid it incur any tax fees during 2003 and 2002.

 

(4)          All Other Fees:  None

 

KBA Group LLP did not provide other services.

 

(5)          Audit Committee’sPre-Approval Polices and Procedures.

 

The Company’s Board of Directors, consistingof its President and Senior Vice President, approves the scope of services andfees of the outside accountants on an annual basis, generally prior to thebeginning of the services. The Board of Directors did approve fees in theirentirety for the audit and review services described above.  During the years 2003 and 2002, the Companydid not retain the services of an Audit Committee.

 

**SIGNATURES**

 

In accordance with the requirements of the SecuritiesAct of 1933, the Registrant certifies that it has reasonable grounds to believethat it meets all of the requirements for filing on this Form 10-KSB andauthorizes this  statement to be signedon its behalf by the undersigned, thereunto duly authorized, in the city ofDallas, State of Texas, on April 14, 2004.

 

**SureQuestSystems, Inc., a Delaware Corporation**

 
|                   | **(Registrant)** |                                 |
|------------------------|------------------|--------------------------------------|
|                   |             |                                 |   |
|                   |             |                                 |   |
| *Date April 14,  2004* | *By*             | */s/ C. Scott Sykes, Jr.*            |   |
|                   |             | *C. Scott Sykes, Jr. President*      |   |
|                   |             |                                 |   |
|                   | *By*             | */s/ Stan Janczyk*                   |   |
|                   |             | *Stan Janczyk, Principal Accountant* |   |

 

29

----

 

**SUREQUESTSYSTEMS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL STATEMENTS AND**

 

**REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS**

 

**FOR YEARS ENDED DECEMBER 31, 2003 and 2002**

 

----

 

**TABLE OF CONTENTS**

 

 
| REPORT OF INDEPENDENT CERTIFIED PUBLIC  ACCOUNTANTS              |   |
|------------------------------------------------------------------|--------|
|                                                             |   |
| FINANCIAL STATEMENTS                                             |   |
|                                                             |   |
| Consolidated Balance Sheets                                      |   |
| Consolidated Statements of Operations                            |   |
| Consolidated Statement of Changes in  Shareholders’ Deficit |   |
| Consolidated Statements of Cash Flows.                           |   |
| Notes to Consolidated Financial Statements                       |   |

 

F-1

----

 

**REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS**

 

**Tothe Board of Directors and Shareholders**

 

of SureQuest Systems, Inc.

 

We have audited the accompanying consolidatedbalance sheets of SureQuest Systems, Inc. and subsidiaries as of December 31,2003 and 2002 and the related consolidated statements of operations, changes inshareholders’ deficit and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States. Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the consolidated financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of SureQuest Systems, Inc. and subsidiaries as of December31, 2003 and 2002 and the results of their operations and their cash flows forthe years then ended in conformity with accounting principles generallyaccepted in the United States.

 

As described in Note 3, the accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. The Company has experienced losses of$790,481 and $934,458 for 2003 and 2002, respectively. Additionally, atDecember 31, 2003, the Company’s current liabilities exceeded its currentassets by $1,036,670 and its total liabilities exceeded its total assets by$2,503,710. At December 31, 2003, total liabilities include $629,394 of payrolltax obligations and related penalties and interest.  These conditions raise substantial doubt about the Company’sability to continue as a going concern. Unless the Company increases cash flowsfrom operations or obtains additional financing, it will not be able to meetits obligations as they come due and it will be unable to execute its long-termbusiness plan. Management’s plans as they relate to these issues are alsoexplained in Note 3. The consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

 

**KBAGROUP LLP**

Dallas, Texas

March 19, 2004

 

F-2

----

 

**SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **

**ASSETS**

 
|                                                                                                                                               |   | **DECEMBER  31,  2003** |    | **DECEMBER  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
|                                                                                                                                               |   |                    |    |                    |   |
| CURRENT ASSETS                                                                                                                                     |   |                    |    |                    |   |
| Cash and cash equivalents                                                                                                                          |   | $                       | 84,852  |                    | $      | 25,380 |   |
| Accounts receivable – trade, less allowance  for doubtful accounts of $6,601 and $25,897 at December 31, 2003 and 2002,  respectively         |   | 168,055                 |    | 146,356                 |   |
| Current portion of notes receivable                                                                                                                |   | 12,021                  |    | 2,500                   |   |
| Prepaid expenses and other current assets                                                                                                          |   | 25,282                  |    | 13,134                  |   |
| Total current assets                                                                                                                               |   | 290,210                 |    | 187,370                 |   |
|                                                                                                                                               |   |                    |    |                    |   |
| NOTES RECEIVABLE - net of current portion                                                                                                          |   | 100,841                 |    | —                  |   |
|                                                                                                                                               |   |                    |    |                    |   |
| PROPERTY AND EQUIPMENT                                                                                                                             |   |                    |    |                    |   |
| Computer equipment                                                                                                                                 |   | 114,764                 |    | 181,669                 |   |
| Office furniture and fixtures                                                                                                                      |   | 14,141                  |    | 13,871                  |   |
| Office and other equipment                                                                                                                         |   | 44,911                  |    | 44,911                  |   |
| Leasehold improvements                                                                                                                             |   | 62,357                  |    | 62,357                  |   |
|                                                                                                                                               |   | 236,173                 |    | 302,808                 |   |
| Less: accumulated depreciation and  amortization                                                                                                   |   | (199,213                | )       | (256,160                | )      |
| Net property and equipment                                                                                                                         |   | 36,960                  |    | 46,648                  |   |
|                                                                                                                                               |   |                    |    |                    |   |
| OTHER ASSETS                                                                                                                                       |   |                    |    |                    |   |
| Land held for sale, net                                                                                                                            |   | —                  |    | 150,000                 |   |
| Capitalized software development costs, net  of accumulated amortization of $2,042,056 and $1,907,495 at December 31, 2003  and 2002, respectively |   | —                  |    | 134,561                 |   |
| Other                                                                                                                                              |   | 6,131                   |    | 6,131                   |   |
| Total other assets                                                                                                                                 |   | 6,131                   |    | 290,692                 |   |
|                                                                                                                                               |   |                    |    |                    |   |
| TOTAL ASSETS                                                                                                                                       |   | $                       | 434,142 |                    | $      | 524,710 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-3

----

 

**SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **

**LIABILITIES AND SHAREHOLDERS’ DEFICIT**

 
|                                                                                                                                                               |   | **DECEMBER  31,  2003** |    | **DECEMBER  31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| CURRENT LIABILITIES                                                                                                                                                |   |                    |    |                    |   |
| Current portion of convertible debentures                                                                                                                          |   | $                       | 6,759   |                    | $      | 11,932 |   |
| Current portion of notes payable to  officers, shareholders and affiliates                                                                                         |   | 60,278                  |    | 111,098                 |   |
| Current portion of long-term debt and  credit lines                                                                                                                |   | 55,025                  |    | 60,215                  |   |
| Accounts payable – trade                                                                                                                                      |   | 125,450                 |    | 177,044                 |   |
| Payroll tax obligations                                                                                                                                            |   | 629,394                 |    | 655,672                 |   |
| Accrued expenses                                                                                                                                                   |   | 59,819                  |    | 38,462                  |   |
| Accrued interest (including $344,652 and  $297,115 to related parties)                                                                                             |   | 350,546                 |    | 301,655                 |   |
| Advances from officers and affiliates                                                                                                                              |   | 39,609                  |    | 7,816                   |   |
| Total current liabilities                                                                                                                                          |   | 1,326,880               |    | 1,363,894               |   |
|                                                                                                                                                               |   |                    |    |                    |   |
| CONVERTIBLE DEBENTURES, net of current  portion                                                                                                                    |   | 220,285                 |    | 219,638                 |   |
| NOTES PAYABLE TO OFFICERS, SHAREHOLDERS AND  AFFILIATES, net of current portion                                                                                    |   | 784,491                 |    | 808,707                 |   |
| LONG-TERM DEBT, net of current portion                                                                                                                             |   | 75,408                  |    | 118,326                 |   |
| DEFERRED COMPENSATION                                                                                                                                              |   | 530,788                 |    | 430,788                 |   |
| Total liabilities                                                                                                                                                  |   | 2,937,852               |    | 2,941,353               |   |
|                                                                                                                                                               |   |                    |    |                    |   |
| COMMITMENTS AND CONTINGENCIES (Notes 3 and  13)                                                                                                                    |   | —                  |    | —                  |   |
|                                                                                                                                                               |   |                    |    |                    |   |
| SHAREHOLDERS’ DEFICIT                                                                                                                                         |   |                    |    |                    |   |
| Preferred Stock – $.001 par value,  10,000,000 shares authorized, none issued and outstanding                                                                 |   | —                  |    | —                  |   |
| Common Stock – $.001 par value, 100,000,000  shares authorized, 44,557,222 and 36,190,497 issued and outstanding at  December 31, 2003 and 2002, respectively |   | 44,557                  |    | 36,190                  |   |
| Additional paid-in capital                                                                                                                                         |   | 6,172,734               |    | 5,477,687               |   |
| Accumulated deficit                                                                                                                                                |   | (8,721,001              | )       | (7,930,520              | )      |
| Total shareholders’ deficit                                                                                                                                   |   | (2,503,710              | )       | (2,416,643              | )      |
|                                                                                                                                                               |   |                    |    |                    |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT                                                                                                                   |   | $                       | 434,142 |                    | $      | 524,710 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-4

----

 

**SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                               |   | **YEAR ENDED  DECEMBER 31,  2003** |     | **YEAR ENDED  DECEMBER 31,  2002** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|----------|------------------------------------|--------|
| Revenues                                                                           |   |                               |     |                               |   |
| Dietary services and supplies                                                      |   | $                                  | 566,607  |                               | $      | 567,865 |   |
| Software sales and rental                                                          |   | 781,350                            |     | 635,408                            |   |
| Total revenues                                                                     |   | 1,347,957                          |     | 1,203,273                          |   |
|                                                                               |   |                               |     |                               |   |
| Cost of revenues                                                                   |   |                               |     |                               |   |
| Dietary services and supplies                                                      |   | 260,991                            |     | 199,533                            |   |
| Software sales and rental                                                          |   | 433,876                            |     | 474,537                            |   |
| Total cost of revenues                                                             |   | 694,867                            |     | 674,070                            |   |
| Gross profit                                                                       |   | 653,090                            |     | 529,203                            |   |
|                                                                               |   |                               |     |                               |   |
| Operating expenses                                                                 |   |                               |     |                               |   |
| Sales and marketing                                                                |   | 117,464                            |     | 53,917                             |   |
| General and administrative                                                         |   | 1,073,776                          |     | 1,141,346                          |   |
| Depreciation and amortization                                                      |   | 18,339                             |     | 22,711                             |   |
| Total operating expenses                                                           |   | 1,209,579                          |     | 1,217,974                          |   |
|                                                                               |   |                               |     |                               |   |
| Loss from operations                                                               |   | (556,489                           | )        | (688,771                           | )      |
|                                                                               |   |                               |     |                               |   |
| Other income (expense)                                                             |   |                               |     |                               |   |
| Interest expense, net (including $132,756  and $94,338 to related parties)         |   | (200,206                           | )        | (140,855                           | )      |
| Tax penalties                                                                      |   | (11,319                            | )        | (7,826                             | )      |
| Gain from debt settlement                                                          |   | —                             |     | 30,294                             |   |
| Unrealized loss on land held for sale                                              |   | —                             |     | (127,300                           | )      |
| Realized loss on land held for sale                                                |   | (22,467                            | )        | —                             |   |
| Total other expense, net                                                           |   | (233,992                           | )        | (245,687                           | )      |
| Net loss before income tax provision                                               |   | (790,481                           | )        | (934,458                           | )      |
|                                                                               |   |                               |     |                               |   |
| Income tax provision                                                               |   | —                             |     | —                             |   |
| Net loss                                                                           |   | $                                  | (790,481 | )                                  | $      | (934,458 | ) |
|                                                                               |   |                               |     |                               |   |
| Basic and diluted net loss per weighted  average share of common stock outstanding |   | $                                  | (0.02    | )                                  | $      | (0.03 | ) |
|                                                                               |   |                               |     |                               |   |
| Weighted average number of shares of basic  and diluted common stock outstanding   |   | 41,287,772                         |     | 35,875,990                         |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-5

----

 

**SUREQUEST SYSTEMS, INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’DEFICIT**

 
|                                                                                                                                                               |   | **Number  of Issued  Common  Shares** |   | **Common  Stock  Amount** |   | **Number of  Issued  Preferred “A”  Shares** |   | **Preferred  “A”  Stock Amount** |   | **Number of  Issued  Preferred “C” Shares** |   | **Preferred  “C” Stock  Amount** |   | **Additional  Paid-In  Capital** |   | **Total  Accumulated  Deficit** |   | **Shareholders’  Deficit** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------|--------|--------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------------------|--------|--------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
| Balance at January 1, 2002                                                                                                                                         |   | 35,880,840                            |   | $                         | 35,881 |                                                   | — |                                       | $      | —                                                |   | —                                     |   | $                                | — |                            | $      | 5,130,549                       |   | $ | (6,996,062 | ) | $ | (1,829,632 | ) |
|                                                                                                                                                               |   |                                  |   |                      |   |                                                   |   |                                       |   |                                                  |   |                                       |   |                             |   |                            |   |                            |   |
| Common stock issued as compensation                                                                                                                                |   | 679,000                               |   | 679                       |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 19,026                           |   |                            |   | 19,705                          |   |
| Common stock issued as payment for consulting services                                                                                                             |   | 4,015,846                             |   | 4,016                     |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 215,726                          |   |                            |   | 219,742                         |   |
| Common stock options exercised                                                                                                                                     |   | 750,000                               |   | 750                       |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 107,250                          |   |                            |   | 108,000                         |   |
| Net loss for year                                                                                                                                                  |   |                                  |   |                      |   |                                                   |   |                                       |   |                                                  |   |                                       |   |                             |   | (934,458                        | )      | (934,458                        | )      |
| Balance at December 31, 2002                                                                                                                                       |   | 41,325,686                            |   | 41,326                    |   | —                                                 |   | —                                     |   | —                                                |   | —                                     |   | 5,472,551                        |   | (7,930,520                      | )      | (2,416,643                      | )      |
|                                                                                                                                                               |   |                                  |   |                      |   |                                                   |   |                                       |   |                                                  |   |                                       |   |                             |   |                            |   |                            |   |
| Common stock cancelled                                                                                                                                             |   | (35,000                               | )      | (35                       | )      |                                                   |   |                                       |   |                                                  |   |                                       |   | 35                               |   |                            |   | —                          |   |
| Common stock issued in conjunction with debt                                                                                                                       |   | 250,000                               |   | 250                       |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 2,250                            |   | —                          |   | 2,500                           |   |
| Balance at April 22, 2003 (prior to effects of reincorporation at  same date)                                                                                      |   | 41,540,686                            |   | 41,541                    |   | —                                                 |   | —                                     |   | —                                                |   | —                                     |   | 5,474,836                        |   | (7,930,520                      | )      | (2,414,143                      | )      |
| Common stock purchased and canceled — dissenting shareholders  rescission rights                                                                              |   | (886,324                              | )      | (886                      | )      |                                                   |   |                                       |   |                                                  |   |                                       |   | (7,977                           | )      |                            |   | (8,863                          | )      |
| Conversion of Nevada common stock to Nevada Series “A” preferred  stock (400 to 1)                                                                       |   | (17,363,640                           | )      | (17,364                   | )      | 43,409                                                 |   | 43                                         |   |                                                  |   |                                       |   | 17,321                           |   |                            |   | —                          |   |
| Conversion of Nevada Series “A” preferred stock to Delaware common  stock fair value recorded as compensation and interest expense                       |   | 34,727,280                            |   | 34,727                    |   | (43,409                                                | )      | (43                                        | )      |                                                  |   |                                       |   | 308,248                          |   |                            |   | 342,932                         |   |
| Effect of 1 Delaware common share issued for 40 Nevada common shares  reverse split to those shareholders not awarded Nevada Series “A” preferred  stock |   | (22,708,454                           | )      | (22,708                   | )      |                                                   |   |                                       |   |                                                  |   |                                       |   | 22,708                           |   |                            |   | —                          |   |
| Nevada preferred Series “A” preferred stock issued to consultants as  compensation                                                                       |   |                                  |   |                      |   | 750                                                    |   | 1                                          |   |                                                  |   |                                       |   | 5,999                            |   |                            |   | 6,000                           |   |
| Conversion of Nevada Series “A” preferred stock by consultants to  Delaware restricted common stock                                                      |   | 600,000                               |   | 600                       |   | (750                                                   | )      | (1                                         | )      |                                                  |   |                                       |   | (599                             | )      |                            |   | —                          |   |
| Nevada preferred Series “C” preferred stock issued to consultants as  compensation                                                                       |   |                                  |   |                      |   |                                                   |   |                                       |   | 675,000                                               |   | 675                                        |   | 66,825                           |   |                            |   | 67,500                          |   |
| Conversion of Nevada Series “C” preferred stock by consultants to  Delaware common stock                                                                 |   | 6,750,000                             |   | 6,750                     |   |                                                   |   |                                       |   | (675,000                                              | )      | (675                                       | )      | (6,075                           | )      |                            |   | —                          |   |
| Delaware common stock issued to consultant for services                                                                                                            |   | 50,000                                |   | 50                        |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 34,450                           |   |                            |   | 34,500                          |   |
| Delaware common stock issued to employee as compensation                                                                                                           |   | 31,875                                |   | 32                        |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 31,702                           |   |                            |   | 31,734                          |   |
| Delaware common stock issued in exercise of warrants recorded as  expense                                                                                          |   | 1,792,000                             |   | 1,792                     |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 198,208                          |   |                            |   | 200,000                         |   |
| Warrants issued for services below fair market value recorded as  expense                                                                                          |   |                                  |   |                      |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 8,000                            |   |                            |   | 8,000                           |   |
| Delaware restricted common stock issued for consultant services                                                                                                    |   | 45,500                                |   | 45                        |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 29,455                           |   |                            |   | 29,500                          |   |
| Delaware restricted to common stock issued for employee for services                                                                                               |   | 3,000                                 |   | 3                         |   |                                                   |   |                                       |   |                                                  |   |                                       |   | 1,197                            |   |                            |   | 1,200                           |   |
| Delaware restricted common stock received as payment for obligations  and canceled                                                                                 |   | (24,675                               | )      | (25                       | )      |                                                   |   |                                       |   |                                                  |   |                                       |   | (11,545                          | )      |                            |   | (11,570                         | )      |
| Delaware restricted common stock purchased as treasury and canceled                                                                                                |   | (26                                   | )      | —                    |   |                                                   |   |                                       |   |                                                  |   |                                       |   | (19                              | )      |                            |   | (19                             | )      |
| Net loss for year                                                                                                                                                  |   |                                  |   |                      |   |                                                   |   |                                       |   |                                                  |   |                                       |   |                             |   | (790,481                        | )      | (790,481                        | )      |
| Balance at December 31, 2003                                                                                                                                       |   | 44,557,222                            |   | $                         | 44,557 |                                                   | — |                                       | $      | —                                                |   | —                                     |   | $                                | — |                            | $      | 6,172,734                       |   | $ | (8,721,001 | ) | $ | (2,503,710 | ) |

 

The accompanying notes are an integral partof this consolidated financial statement.

 

F-6

----

 

**SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                        |   | **YEAR  ENDED  DECEMBER 31,  2003** |     | **YEAR  ENDED  DECEMBER 31,  2002** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------------|----------|-------------------------------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                        |   |                                |     |                                |   |
| Net loss                                                                    |   | $                                   | (790,481 | )                                   | $      | (934,458 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |   |                                |     |                                |   |
| Depreciation and amortization                                               |   | 18,339                              |     | 22,711                              |   |
| Amortization of software                                                    |   | 134,561                             |     | 293,585                             |   |
| Realized loss on land held for sale                                         |   | 22,467                              |     | 127,300                             |   |
| Provision for bad debt                                                      |   | 6,367                               |     | 12,633                              |   |
| Common stock issued as employee  compensation                               |   | 312,200                             |     | 19,705                              |   |
| Common stock issued for services                                            |   | 140,461                             |     | 219,742                             |   |
| Common stock issued in conjunction with  debt recorded as interest expense  |   | 63,204                              |     | —                              |   |
| Common stock warrants issued for services                                   |   | 8,000                               |     | —                              |   |
|                                                                        |   |                                |     | —                              |   |
| (Increase) decrease in                                                      |   |                                |     |                                |   |
| Accounts receivable – trade                                            |   | (28,066                             | )        | 27,504                              |   |
| Prepaid expenses and other current assets                                   |   | (22,034                             | )        | (2,684                              | )      |
|                                                                        |   | —                              |     | —                              |   |
| Increase (decrease) in                                                      |   |                                |     |                                |   |
| Accounts payable – trade                                               |   | (51,594                             | )        | (19,283                             | )      |
| Payroll tax obligations                                                     |   | (26,278                             | )        | 56,069                              |   |
| Accrued expenses                                                            |   | 21,357                              |     | (22,267                             | )      |
| Accrued interest                                                            |   | 48,891                              |     | 60,608                              |   |
| Deferred compensation                                                       |   | 100,000                             |     | 56,921                              |   |
| NET CASH USED IN OPERATING ACTIVITIES                                       |   | (42,606                             | )        | (81,914                             | )      |
|                                                                        |   |                                |     |                                |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                        |   |                                |     |                                |   |
| Purchases of property and equipment                                         |   | (8,651                              | )        | (5,424                              | )      |
| Proceeds from sale of land                                                  |   | 15,488                              |     | —                              |   |
| NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES                        |   | 6,837                               |     | (5,424                              | )      |
|                                                                        |   |                                |     |                                |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |   |                                |     |                                |   |
| Net increase in advances from officers and  affiliates                      |   | 31,793                              |     | 7,816                               |   |
| Proceeds from convertible debentures                                        |   | —                              |     | 20,932                              |   |
| Payments on convertible debentures                                          |   | (4,526                              | )        | (1,805                              | )      |
| Proceeds from notes payable to officers, shareholders  and affiliates       |   | —                              |     | 25,000                              |   |
| Payments on notes payable to officers,  shareholders and affiliates         |   | (75,036                             | )        | (83,723                             | )      |
| Proceeds from credit lines and long-term  debt                              |   | —                              |     | 50,000                              |   |
| Payments on credit lines and long-term debt                                 |   | (48,108                             | )        | (30,087                             | )      |
| Proceeds from exercise of stock options                                     |   | —                              |     | 108,000                             |   |
| Proceeds from warrants exercised                                            |   | 200,000                             |     | —                              |   |
| Payments to shareholders - stock rescission  rights                         |   | (8,863                              | )        | —                              |   |
| Purchase of common stock as treasury and  canceled                          |   | (19                                 | )        | —                              |   |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                   |   | 95,241                              |     | 96,133                              |   |
|                                                                        |   |                                |     |                                |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                   |   | 59,472                              |     | 8,795                               |   |
|                                                                        |   |                                |     |                                |   |
| Cash and cash equivalents at beginning of  year                             |   | 25,380                              |     | 16,585                              |   |
|                                                                        |   |                                |     |                                |   |
| Cash and cash equivalents at end of year                                    |   | $                                   | 84,852   |                                | $      | 25,380 |   |
|                                                                        |   |                                |     |                                |   |
| SUPPLEMENTAL DISCLOSURES OF INTEREST AND  INCOME TAXES PAID                 |   |                                |     |                                |   |
|                                                                        |   |                                |     |                                |   |
| Interest paid on borrowings                                                 |   | $                                   | 59,361   |                                | $      | 80,000 |   |
| Income taxes paid                                                           |   | $                                   | —   |                                | $      | — |   |

 

F-7

----

 
|                                                                  |   | **YEAR  ENDED  DECEMBER 31,  2003** |    | **YEAR  ENDED  DECEMBER 31,  2002** |   |
|-----------------------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|
|                                                                  |   |                                |    |                                |   |
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING  AND FINANCING ACTIVITIES |   |                                |    |                                |   |
|                                                                  |   |                                |    |                                |   |
| Issuance of note receivable in exchange for  land held for sale       |   | $                                   | 112,045 |                                | $      | -0 | -  |
|                                                                  |   |                                |    |                                |   |
| Common stock received in payment of  employee advances                |   | $                                   | 9,887   |                                | $      | -0 | -  |
|                                                                  |   |                                |    |                                |   |
| Common stock received in payment of note  receivable                  |   | $                                   | 1,682   |                                | $      | -0 | -  |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-8

----

 

**SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**DECEMBER 31, 2003 AND 2002**

 

**NOTE1 - BACKGROUND AND ORGANIZATION**

 

SureQuest Systems, Inc., is a publicly tradedcompany, and was incorporated under the laws of the State of Nevada on August19, 1941.  Effective April 22, 2003,SureQuest Systems, Inc. re-domiciled from Nevada to Delaware by merging withSureQuest Systems, Inc., a newly formed Delaware corporation, (“SureQuestDelaware”) with SureQuest Delaware surviving the merger.  SureQuest Systems, Inc. is in the businessof providing dietary services, supplies and consulting, and developing andselling dietary proprietary management software products primarily to hospitals,nursing homes and assisted living facilities in the United States andCanada.   SureQuest Systems, Inc. alsoprovides private labeling of its dietary software and services to certainresellers,  primarily food distributioncompanies.

 

The incorporation to Delaware increased theauthorized common shares from 50,000,000 to 100,000,000 and the authorizedpreferred shares from 1,000,000 to 10,000,000. Under the terms of the merger, holders of record as of February 26, 2003received one Delaware common share in exchange for 40 Nevada common shares.   Prior to this record date, the Company’sBoard of Directors awarded management, employees, creditors and certainaffiliates of these persons, convertible preferred stock in exchange for Nevadacommon stock that allowed these persons to convert each share of convertiblepreferred held to 800 Delaware common shares. As a result, those Nevada common shareholders that did not receiveconvertible preferred stock awards experienced significant dilution.  In addition, holders of options at therecord date of February 26, 2003 to acquire the Company’s common stock wereaffected by the reincorporation as their exercise price to acquire Delawarecommon shares increased by a multiple of 40 from the original grant price andthe number of shares originally awarded were reduced by a multiple of 40.  The accompanying financial statements forthe year ended December 31, 2002 have been adjusted, where appropriate, toreflect the effect of this reincorporation on an “as if” basis.  Accordingly, the presentation of commonshares outstanding at December 31, 2002, earnings per share computations andoptions and warrants outstanding have been restated to this “as if “presentation.  Please refer to Note 14-Reincorporation and Changes in Stockholders’ Deficit for a description of theeffects of this reincorporation to the accompanying financial statements.

 

**NOTE2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Principlesof Consolidation**

 

The financial statements include the accountsof SureQuest Systems, Inc. and its wholly-owned subsidiary, SureQuest Systems,Inc. of Texas, collectively referred to as “the Company”. All significantinter-company transactions have been eliminated.

 

**Cashand Cash Equivalents**

 

For Statement of Cash Flows purposes, theCompany considers all cash in banks, certificates of deposit and otherhighly-liquid investments with maturities of three months or less whenpurchased to be cash and cash equivalents.

 

**RevenueRecognition**

 

The Company’s revenue recognition policiesare consistent with the American Institute of Certified Public Accountant’sStatement of Position (SOP) 97-2, software revenue recognition, SOP 98-9 whichis a modification of SOP 97-2, and the Securities and Exchange Commission (SEC)Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”. SAB 104summarizes certain aspects of the SEC’s views in applying generally acceptedaccounting principles to revenue recognition in financial statements.  Revenue is recognized at the time servicesare performed or goods are shipped, except for revenue from software licensespurchased by “private label” distributors, which is recognized when payment isreceived or collectibility is certain, due to the uncertainties of the customercommitment. Software license revenue is recognized at the date persuasiveevidence of a sale arrangement exists, delivery and installation has occurred,and the fee is fixed or determinable and collection is probable.   The Company requires a minimum of one halfof the license purchase price as a deposit at the date of contract sale and theremainder at installation.   The Companydoes not recognize the deposit as revenue until such time as installation iscomplete.  Bulk license revenues fromresellers are recognized at the date that the master software is delivered andinstalled and no uncertainty or contingencies exist regarding collection.   Software support and maintenance contractsprovide the customer access to telephone support and software updates,including remediation updates  but donot include rights to new software functionality or products.  Customer support and maintenance contractsare priced separately from the software license and are billed  either monthly, quarterly, semi-annually orannually and the related revenue is 

 

F-9

----

 

generally recognized ratably over the term ofthe support contract.  Software trainingservices provided by the Company are priced separately.  The Company’s dietary software products aretypically licensed separately and are not bundled with other services,training  or maintenance andsupport.  Should these products andservices be grouped together as a contract offering, revenue would be allocatedto the components based on vendor specific objective evidence and recognized separatelyfor each component in accordance with SOP 97-2, SOP 98-9 and SAB 104.  Certain of the Company’s DOS platformcustomers operate under terms of thirty day open ended rental agreements thatare cancelable by either party with thirty days notice.   The maintenance and support fee is embeddedwith the monthly rental fee.  Due to theobsolescence of the DOS platform, customers using these monthly rentalarrangements are diminishing and the associated revenues are not  significant.  At this time, these open ended rental agreements are not asignificant portion of the Company’s revenues.    Upon software installation, the customer contractually does nothave recourse to return the product for refund unless the product does notperform in accordance with written specifications.   Historically, the Company has not received a request for refundsubsequent to installation.

 

Current reseller contractual agreements donot provide for a contractual right of return, price concessions, or minimumpurchase commitments.  The Company doesprovide, in certain circumstances, discounts for bulk license purchases, basedon minimum number of licenses purchased. Payment to the Company for bulk purchase of licenses is not contingentupon the reseller’s future licensing of these products and therefore, revenueis recognized at the date that the master license is installed and collectionis certain from the reseller.   Inregards to multi-facility customers, revenue is recognized at the date that acorporate license master is delivered and installed.  The customer is then responsible for providing software to itsfacilities using the corporate master. The Company applies the residual method of accounting due to expectednon-recurring costs related to these multi-facility customers.

 

The Company also provides hard copy menu anddata base management services directly to its customers and through resellerarrangements.  Hard copy menu servicesprimarily consist of a six-month menu cycle, delivered by the Company inadvance of the menu period.  Currently,the Company bills customers and/or resellers for these hard copy menus monthlyand the facility receiving the menu is committed to a three month  payment commitment.  The Company recognizes revenues from theseservices on a monthly basis as billed. Direct supplies expense associated with the development of the hard copymenus are capitalized and amortized over the six-month menu cycle.

 

The Company’s product development strategy isstructured around the current and future releases of Microsoft Windowsoperating systems.  These operatingsystems are well established and the Company believes that this strategyreduces the potential exposure to product obsolescence due to rapid changes incustomer preferences.  It is possiblethat these factors may change in the future as the Company’s business model isadapted to changes in technology and the changes in the software industry’srevenue license models.

 

**AccountsReceivable**

 

Trade accounts receivable are stated at theamount the Company expects to collect. In the normal course of business, the Company extends unsecured creditto virtually all of its rental and menu forms and supplies customers and fortechnical support and maintenance services.  The Company provides for an allowance for bad debt for those accountsconsidered doubtful of collection. Management considers the following factors when determining thecollectibility of specific customer accounts: customer credit-worthiness, pasttransaction history with the customer, current economic industry trends, andchanges in customer payment terms.  Ifthe financial condition of customers were to deteriorate, adversely affectingtheir ability to make payments, additional allowances would be required.  Based on management’s assessment, the Companyprovides for estimated uncollectible amounts thorough a charge to earnings anda credit to a valuation allowance. Balances that remain outstanding after reasonable collection efforts arewritten off through a charge to the valuation allowance and a credit toaccounts receivable.      Bad debtexpense for the years ended December 31, 2003 and 2002 is $6,367 and $12,633,respectively.

 

F-10

----

 

**Propertyand Equipment**

 

Property and equipment is recorded at costand is depreciated on a straight-line basis, over the estimated useful life(generally 3 to 10 years) of the respective asset. Major additions andbetterments are capitalized and depreciated over the remaining estimated usefullife of the related assets. Maintenance, repairs, and minor improvements arecharged to expense as incurred. Depreciation expense for the years endedDecember 31, 2003 and 2002 was $10,771 and $9,901, respectively. Leaseholdimprovements are capitalized and amortized over the shorter of the life of theimprovement or the remaining life of the lease. Leasehold improvements arefully amortized at December 31, 2003. Amortization expense for the years ended December 31, 2003 and 2002related to leasehold improvements is $7,568 and $12,810, respectively.

 

**CapitalizedSoftware Costs**

 

The Company classifies the costs of planning,designing and establishing the technological feasibility of a computer softwareproduct as research and development costs and charges these costs to expensewhen incurred. After technological feasibility has been established, i.e. theCompany has a working model in use, costs of producing a marketable product andproduct masters are capitalized and amortized on a product-by-product basisusing the straight-line method over the estimated life of the product (5years). Subsequent software updates and modifications are expensed as incurred.Quarterly, the Company evaluates the recoverability of the carrying value ofthe capitalized software costs by comparing the unamortized capitalized coststo the net realized value, as determined by an undiscounted cash flow analysis.The amount by which the carrying value exceeds the net realizable value, ifany, is written off. Cost of maintenance and customer support is charged toexpense as incurred.  The Company’ssoftware is fully amortized at December 31, 2003.

 

**Long-LivedAssets**

 

The Company accounts for the impairment anddisposition of long-lived assets in accordance with Statement of FinancialAccounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets”.  In accordancewith SFAS No. 144, long-lived assets are reviewed for events or changes incircumstances which indicate that their carrying value may not be recoverable.These evaluations include comparing the future undiscounted cash flows of suchassets to their carrying value. If the carrying value exceeds the futureundiscounted cash flows, the assets are written down to their fair value.During the year 2002, the Company had determined that there was a permanentdecline in the carrying value of the land held for sale. Accordingly, theCompany recorded a  $127,300 unrealizedloss in the Consolidated Statement of Operations for the year ended December31,  2002.   During the year ended December 31, 2003, the Company sold theland.

 

F-11

----

 

**IncomeTaxes**

 

The Company utilizes the asset and liabilityapproach to financial accounting and reporting for income taxes. Deferredincome tax assets and liabilities are computed annually for differences betweenthe financial statements and tax basis of assets and liabilities that willresult in taxable or deductible amounts in the future based on enacted tax lawsand rates applicable to the periods in which the differences are expected toaffect taxable income. Valuation allowances are established when necessary toreduce deferred tax assets to the amount expected to be realized. Income taxexpense or benefit is the tax payable or refundable for the period plus orminus the change during the period in deferred tax assets and liabilities.

 

**Useof Estimates and Assumptions**

 

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could vary from the estimates thatwere used.

 

**LossPer Share**

 

Basic loss per share is computed by dividingconsolidated net loss by the weighted average number of shares of common stockoutstanding during the year. The common stock equivalents, totaling 1,401,940and 421,163 for the years 2003 and 2002, respectively, are not included in thediluted loss per share for 2003 and 2002 as their effect would further dilutethe loss per share.  The loss per share forthe year ended December 31, 2002 has been restated to reflect the 2002 loss pershare as if the effect of the reincorporation occurred at January 1, 2002.

 

**Stock-BasedCompensation**

 

The Company accounts for stock-based employeecompensation arrangements in accordance with provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees”.  Under APB Opinion No. 25,compensation expense for employees is based on the excess, if any, on the dateof grant, of the fair value of the Company’s stock over the exerciseprice.  Had the Company determinedcompensation based on the fair value at the grant date for its stock optionsunder SFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFASNo. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-AnAmendment of FASB Statement No. 123,” the net loss and loss per share would nothave significantly differed from reported net loss.

 

The Company accounts for equity instrumentsissued to non-employees in accordance with the provisions of SFAS No. 123 asamended by SFAS No. 148 and Emerging Issues Task Force Issue No. 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services.” All transactionsin which goods or services are the consideration received for the issuance ofequity instruments are accounted for based on the fair value of theconsideration received or the fair value of the equity instrument issued,whichever is more reliably measurable. The measurement date of the fair valueof the equity instrument issued is the earlier of the date on which thecounterparty’s performance is complete or the date on which it is probable thatperformance will occur.

 

**CreditRisk**

 

The Company’s accounts receivable at December31, 2003  are subject to credit riskconcentration.  Three accounts representapproximately 54% of the accounts receivable at December 31, 2003.  These same three accounts representedapproximately 30% of the accounts receivable at December 31, 2002.

 

**NOTE3 - GOING CONCERN UNCERTAINTY**

 

The consolidated financial statements havebeen prepared on the assumption that the Company will continue as a goingconcern. The Company sustained net losses of $790,481 and $934,458 during theyears ended December 31, 2003 and 2002, respectively, and net cash used byoperating activities for the same periods aggregated $42,606 and $81,914,respectively. Additionally, current liabilities at December 31, 2003 of$1,326,880 exceed current assets of $290,210 and total liabilities at December31, 2003 of $2,937,852 exceed total assets of $434,142.  The Company’s continued existence dependsupon the success of management’s efforts to raise additional 

 

F-12

----

 

capital necessary to meet the Company’sobligations as they come due and to increase market penetration to increaserevenues.  The Company intends to obtaincapital primarily through debt financing. There can be no degree of assurancegiven that the Company will be successful in obtaining additional financing orthat the Company will increase revenues to be profitable in the near future.

 

F-13

----

 

The consolidated financial statements do notinclude any adjustments to reflect the possible effects on the recoverabilityand classification of assets or classification of liabilities which may resultfrom the inability of the Company to continue as a going concern.

 

**NOTE4 - NOTES RECEIVABLE**

 

During 2003, the Company sold its land heldfor sale and received as consideration $15,488 net cash proceeds and a $112,045note receivable bearing a 7% interest rate. Terms of the note receivable include equal annual payments of $11,205beginning August 13, 2004 and each year thereafter with the final payment dueAugust 2013.  The Company has assignedthese payments to a creditor bank with which the Company has a $85,000obligation.  The bank has secured a lienon the land until the $85,000 obligation has been retired.  In the event the purchaser defaults in theinstallment obligations, the land will revert to the Company and the Companywill be obligated to redeem the $85,000 obligation directly.

 

**NOTE5 - CAPITALIZED SOFTWARE COSTS**

 

The Company has two dietary softwarepackages, a DOS based platform that was developed internally, and a Windowsbased platform that was purchased during 1998. The DOS package is primarilytargeted to customers interested in more simple dietary applications and prefermonthly rental agreement payment terms.   DOS license revenues continue to decrease and for the years endedDecember 31, 2003 and 2002 were $58,142 and $78,732, respectively.  The Windows based package offers single andmulti-user versions and is primarily the product of choice for the Company’sreseller distribution alliances. The DOS package was fully amortized atDecember 31, 2000 and the Windows based package was fully amortized at December31, 2003.  Amortization expense relatedto the Windows package is $134,561 and $293,585 for the years ended December 31, 2003 and 2002, respectively.

 

F-14

----

 

**NOTE6 - CONVERTIBLE DEBENTURES**

 

During 2001, October 2002,  and again inSeptember 2003, the Company extended terms of two debentures. The first debenture,  issued during 2001,  bears an annual interest rate of 10%.   Terms of repayment include monthly interestonly payments through September 2003.  Beginning October 1, 2003 and payable each month thereafter throughOctober 1, 2008, the Company will remit equal monthly payments of $993.  The remaining principal balance of $75,160is due on October 1, 2008.   During2001, the holder was issued 250,000 common shares and warrants to purchase3,125 common shares at $1.60 per share that originally expired February 28,2003 which term was extended to February 27, 2005.   The number of warrants and exercise price as presented hereinwas restated effective April 23, 2003, to reflect the Company’s reincorporationto Delaware.  This debenture is securedby the Company’s accounts receivable. The principal of this debenture at December 31, 2003 is $91,755.   The second debenture is unsecured and bearsinterest of 11%. As additional consideration, during 2001 the holder wasgranted warrants to acquire 31,309 common shares with exercise prices rangingfrom $1.60 to $3.00 per share.  Thenumber of warrants and exercise price as presented herein was restated April23, 2003 to reflect the Company’s reincorporation to Delaware. These warrantsinitially expired January 20, 2003 and were extended during September 2002 toOctober 2004.  The principal balance ofthis debenture at December 31, 2003 is $135,289.  Terms of repayment include monthly only interest payments of$1,264 through September 2003. Beginning October 1, 2003, and each monththereafter through October 2008, the Company will remit equal monthly paymentsof  $1,548.  At October 1, 2008 the remaining principal balance of $112,377 isdue.  This debenture is payable ondemand in the event that the Company secures investment capital equal to or inexcess of $3,000,000.  On January 24,2003 the Company awarded the debentures holder convertible preferred stock inexchange for 146,500 of the Company’s Nevada common shares.   These convertible preferred shares wereconverted to the Company’s Delaware common shares on April 22, 2003.  As a result, the debenture holder received293,000 Delaware common shares at conversion. The Company recognized interest expense of  $2,893 as a result of this award.

 
|                                        |   | **2003** |    | **2002** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|
| Total convertible debentures                |   | $        | 227,044 |     | $      | 231,570 |   |
|                                        |   |     |    |     |   |
| Less current maturities                     |   | (6,759   | )       | (11,932  | )      |
| Long term obligation-convertible debentures |   | $        | 220,285 |     | $      | 219,638 |   |

 

Principal maturities of convertibledebentures are as follows at December 31, 2003:

 

| **Year**   |   |    |    |
|------------|--------|---------|---------|
| 2004       |   | $       | 6,759   |   |
| 2005       |   | 7,500   |    |
| 2006       |   | 8,344   |    |
| 2007       |   | 9,271   |    |
| 2008       |   | 195,170 |    |
| Thereafter |   | —  |    |
|       |   | $       | 227,044 |   |

 

**NOTE7 - NOTES PAYABLE TO OFFICERS, SHAREHOLDERS & AFFILIATES**

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Unsecured promissory note payable to  shareholder affiliate; interest at 10% per annum; monthly principal and  interest of $1,785 beginning June 2002 with final monthly payment due April  2008; on January 24, 2003 the Company awarded the note holder convertible  preferred stock in exchange for the Company’s Nevada common shares; these  preferred shares were converted to 424,508 of the Company’s Delaware common  shares on April 22, 2003 and the Company recognized $4,192 interest expense  as a result of this award. |   | $        | 76,228 |     | $      | 89,308 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |     |   |     |   |
| Unsecured promissory note payable to  shareholder affiliate; interest payable semi-annually at 8% per annum;  principal payable on demand; on January 24, 2003 the Company awarded the note  holder and its affiliates convertible preferred stock in exchange for the  Company’s Nevada common shares; these preferred shares were converted to  381,208 of the Company’s Delaware common shares on April 22, 2003 and the  Company recognized $3,764 interest expense as a result of this award.                                     |   | 10,000   |   | 10,000   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |     |   |     |   |
| Unsecured demand promissory note payable to  shareholder; interest payable at 10% per annum; principal payable on  demand;  on January 24, 2003 the  Company awarded the note holder convertible preferred stock in exchange for  the Company’s Nevada common shares; these preferred shares were converted to  11,100 of the Company’s Delaware common shares on April 22, 2003 and the  Company recognized $110 interest expense as a result of this award.                                                                     |   | 8,737    |   | 12,801   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |        |          |        |          |        |  |  |

 

F-15

----

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **2003** |    | **2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |    |     |   |
| Promissory note to shareholder affiliate;  interest at 10% per annum with total accrued interest and principal payable  on demand; security interest in all assets of the Company subordinated to a  certain shareholder holding prioritized liens; shareholder affiliate has  verbal agreement not to demand redemption during the year 2004; on January  24, 2003 the Company awarded the holder convertible preferred stock in  exchange for the Company’s Nevada common shares; these preferred shares were  converted to 1,100,000 of the Company’s Delaware common shares on April 22,  2003 and the Company recognized $10,862 interest expense as a result of this  award                                                                                                                                                                                                                                                                                                                          |   | 500,000  |    | 500,000  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |    |     |   |
| Promissory note to shareholder; 100,000  shares of the Company stock held in escrow as security; interest to accrue  through March 10, 2004 at 10%; $2,315 monthly payment on April 10, 2004  followed by $3,000 monthly payments thereafter with final balloon principal  payment on January 10, 2010; in addition, holder will be repaid, if any, at  3% of monthly cash proceeds in excess of $130,000; cash proceeds shall  include gross receipts from operations, net proceeds from equity or debt  funding, and/or net proceeds from sales of certain assets; payment to be made  on tenth day of month following month of cash receipt; on January 24, 2003  the Company awarded the holder and an affiliate convertible preferred stock  in exchange for their Company’s Nevada common shares;  these preferred shares were converted to  2,742,108 of the Company’s Delaware common shares on April 22, 2003 and the  Company recognized $27,078 interest expense as a result of this award |   | 222,711  |    | 222,711  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |    |     |   |
| Promissory note to shareholder with  personal guarantee by Company officer; secured by software source code and  subordinated lien on land; interest at 7.5% monthly with a monthly interest  and principal payment of $3,000 beginning January 2, 2002, six monthly  interest and principal payments of $4,500 beginning February 10, 2002;  thereafter $3,000 monthly interest and principal payments with a final  payment of $1,215 on April 10, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 9,563    |    | 43,434   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |    |     |   |
| Unsecured promissory note to  shareholder/officer; interest at 10% per annum;  payable on demand                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 8,842    |    | 16,551   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |    |     |   |
| Unsecured promissory note to  shareholder/affiliate; interest at 12% per annum;  payable on demand                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 8,688    |    | 25,000   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |    |     |   |
| Total notes payable to officers,  shareholders and affiliates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 844,769  |    | 919,805  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |    |     |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | (60,278  | )       | (111,098 | )      |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $        | 784,491 |     | $      | 808,707 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        |          |         |          |        |  |  |

 

Principal maturities of notes payable toofficers, shareholders, and affiliates are as follows at December 31, 2003:

 

| **Year**   |   | **Principal  Amount** |    |
|------------|--------|-----------------------|---------|
| 2004       |   | $                     | 60,278  |   |
| 2005       |   | 515,963               |    |
| 2006       |   | 17,633                |    |
| 2007       |   | 19,479                |    |
| 2008       |   | 8,705                 |    |
| Thereafter |   | 222,711               |    |
| TOTAL      |   | $                     | 844,769 |   |

 

F-16

----

 

**NOTE8 - CREDIT LINES AND LONG-TERM DEBT**

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| $21,300 revolving credit line  with bank secured by personal guarantee of a shareholder; minimum monthly  payments of 2% of the outstanding principal; interest at 27.98% per annum                                                                                                                                                                                                                                                                       |   | $        | 10,547 |     | $      | 14,733 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Revolving credit line with bank secured by  the personal guarantee of a shareholder; minimum monthly payments of 2% of  the outstanding principal; interest at 16.24% per annum                                                                                                                                                                                                                                                                           |   | 4,750    |   | 6,094    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Revolving credit line with bank secured by  the personal guarantee of an affiliate; interest at 18.32% per annum                                                                                                                                                                                                                                                                                                                                          |   | —   |   | 540      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Promissory note to a bank; secured by  assignment of note receivable payments originating from sale of land;  quarterly interest payments  only at  9.75% per annum through February 25, 2003 and 8.75% per annum thereafter;  $2,500 principal payment during 2003; annual principal payments of $12,143  and accrued interest beginning August 2004   and each August thereafter with a final principal and interest payment  due August 2010 |   | 85,000   |   | 87,500   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Note payable to a bank; collateralized by  the Company’s receivables, inventory and equipment; interest at prime plus  2.75% (7% at December 31, 2002); payable in monthly installments of principal  and interest of $836; matured May 2003                                                                                                                                                                                                         |   | —   |   | 4,103    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Note payable to bank; unsecured; interest  at 10% per annum; payable in monthly installments of principal and interest  of $810; matured November 2003                                                                                                                                                                                                                                                                                                    |   | —   |   | 9,052    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Unsecured promissory note to office lessee  for purpose of leasehold improvements; interest at 11% per annum; payable in  monthly installments of principal and interest of $484; matured July 2003                                                                                                                                                                                                                                                       |   | —   |   | 3,264    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Unsecured promissory note; 10% interest;  payable on demand                                                                                                                                                                                                                                                                                                                                                                                               |   | —   |   | 3,255    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Unsecured promissory note; 12% interest;  payable in quarterly principal and interest installments of $7,500 beginning  April 2003 with final principal payment due January 2005 of $2,551 and  accrued interest                                                                                                                                                                                                                                          |   | 30,136   |   | 50,000   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 130,433  |   | 178,541  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | (55,025  | )      | (60,215  | )      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |   |     |   |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $        | 75,408 |     | $      | 118,326 |   |

 

Principal maturities of credit lines andlong-term debt are as follows at December 31, 2003:

 

| **Year**   |   |   |    |
|------------|--------|--------|---------|
| 2004       |   | $      | 55,025  |   |
| 2005       |   | 14,694 |    |
| 2006       |   | 12,143 |    |
| 2007       |   | 12,143 |    |
| 2008       |   | 12,143 |    |
| Thereafter |   | 24,285 |    |
|       |   | $      | 130,433 |   |

 

F-17

----

 

**NOTE9 - DEFERRED COMPENSATION**

 

Deferred compensation relates to salariesaccrued for a certain officer, not yet paid. Each year’s earned amount isconvertible into common stock of the Company at the common share closing priceas determined on the last business day of each respective year.  At December 31, 2003 and 2002, the officercould have elected to convert the deferred compensation obligation outstandingof $530,788 and $430,788, respectively to 659,505 and 381,728 common shares,respectively. The December 31, 2002 and prior years’ conversion prices andnumber of shares eligible for conversion have been restated to reflect theeffect of the 2003 reorganization to Delaware that provided an exchange of oneDelaware common share for 40 Nevada common shares.  This obligation is recorded as a long-term liability based on theCompany’s ability to redeem and the officer’s representation not to collectduring 2004.

 

**NOTE10 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Statement of Financial Accounting StandardsNo. 107 “Disclosure About Fair Value of Financial Instruments”, requiresdisclosure about the fair value of all financial assets and liabilities forwhich it is practicable to estimate. At December 31, 2003 and 2002 the carryingvalue all of the Company’s accounts receivable, accounts payable and accrued liabilitiesapproximate fair value because of their short term nature. Convertibledebentures, credit lines, notes payable and long-term debt carrying valuesapproximate fair values based on the borrowing rates currently available to theCompany for loans with similar terms.

 

F-18

----

 

**NOTE11 - PAYROLL TAX OBLIGATIONS AND INCOME TAXES**

 

The Company has not remitted Federal andState employer and employee payroll taxes for certain quarters in the years1998, 1999  2000, and 2002.  On March 5, 2004, the Internal RevenueService notified the Company that the total obligation due for unremittedpayroll taxes as of that date was $619,843 which includes penalty and interest.  In addition, there may be additionalpenalties and interest assessed in the future related to this obligation.  On this same date, the Internal RevenueService also approved an installment payment agreement with the Company thatprovides for an initial payment of $25,000 on April 20, 2004 followed by monthlypayments of $7,500 beginning on May 20, 2004 through September 20, 2004.  On October 20, 2004 a $32,500 installment isdue followed by $12,000 monthly installments beginning on November 20, 2004 andeach month thereafter until the obligation is paid in full.   The Company intends to file an offer incompromise during April 2004 that will propose to reduce the total obligationto the principal amount outstanding that forgives all penalties and interest.  This principal amount is estimated to be$300,000 payable in 24 equal $12,500 monthly installments.  The Company believes that this amount willbe accepted by the Internal Revenue Service as full payment of the obligationbecause a previous proposal submitted on September 20, 2001 for $300,000 wasaccepted by the Internal Revenue Service field examiners during 2003, but wassubsequently denied because the Company failed to meet timely depositobligations on current deposits.  TheCompany will continue to be obligated for the monthly installment agreementpayments during the offer in compromise review.  The Company has recorded a $629,394 liability at December 31,2003 that includes this obligation and is an estimate of the actual payroll taxliability that includes penalties and interest.  There can be no assurance that the Internal Revenue Service willapprove the amount proposed as an offer in compromise settlement or approve anyproposal for settlement other than the current installment agreement in effectas of March 5, 2004.   In addition,there can be no assurance that the Company will be able to meet the monthlyinstallment obligations set forth in that agreement.  The Internal Revenue Service has previously filed a Notice ofFederal Tax Lien that established a security interest in all assets of the Company.  The Company is current with 2003 and 2004payroll tax obligations.

 

**NOTE12 - INCOME TAXES**

 

Deferred tax assets and liabilities atDecember 31, 2003 and 2002 consist of the following:

 
|                           |   | **2003**   |   | **2002**   |   |
|--------------------------------|--------|------------|--------|------------|--------|
| Current deferred tax asset     |   | $          | 10,000 |       | $      | 14,913 |   |
| Non-Current deferred tax asset |   | 1,513,712  |   | 1,408,532  |   |
| Valuation allowance            |   | (1,523,712 | )      | (1,423,445 | )      |
| Net deferred tax asset         |   | $          | — |       | $      | — |   |

 

F-19

----

 

**NOTE12 - INCOME TAXES - CONTINUED**

 

The current deferred tax asset results fromthe allowance for doubtful accounts and accrued vacation.  The non-current deferred tax asset resultsfrom  deferred compensation and the nettax operating loss carry forward of approximately $4,000,000, subject tocertain limitations under Internal Revenue Code Section 342, at December 31,2003 that begins to expire in 2012. At December 31, 2003 and 2002 the netdeferred tax asset has a 100% valuation allowance due to the uncertainty of theCompany generating future taxable income.

 

The Company’s income tax benefit for theyears ended December 31, 2003 and 2002 differed from the statutory federal rateof 34% as follows:

 
|                                                                                    |   | **2003** |     | **2002** |   |
|-----------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Statutory rate applied to loss before  income taxes                                     |   | $        | (268,764 | )        | $      | (317,716 | ) |
| Increase in income taxes resulting from  amounts not deductible for income tax purposes |   | 162,140  |     | 89,058   |   |
| Change in previous years estimate                                                       |   | 6,357    |     | (5,415   | )      |
| Increase in valuation allowance                                                         |   | 100,267  |     | 234,073  |   |
| Income tax benefit                                                                      |   | $        | —   |     | $      | — |   |

 

**NOTE13 - COMMITMENTS AND CONTINGENCIES**

 

The Company has operating leases for itsoffice facilities, an automobile, and certain equipment. Rental expense foroperating leases was $81,474 and $77,224 for 2003 and 2002, respectively.Future minimum rental commitments under non-cancelable leases for thesucceeding five years are as follows:

 
| **Year ended December 31,** |   | **Amount** |    |
|-----------------------------|--------|------------|---------|
| 2004                        |   | $          | 68,319  |   |
| 2005                        |   | 66,954     |    |
| 2006                        |   | 64,806     |    |
| 2007                        |   | 62,400     |    |
| 2008                        |   | 26,000     |    |
|                        |   | $          | 288,479 |   |

 

On February 27, 2004, the Company announcedthrough an 8-K filing with the Securities and Exchange Commission that theSecurities and Exchange Commission has issued a Formal Order of Investigationto conduct a non-public investigation of the Company and, but not limited to,its officers, directors, promoters and broker dealers for the period at leastJanuary 1, 2002 through the present. The purpose of this investigation is to determine whether or notviolations have occurred of, among other things, the registration, anti-fraud, periodicreporting, ownership reporting, and books and records provisions of the federalsecurities laws.  Prior to the issuanceof this order, the Company has voluntarily produced certain documents to theSecurities and Exchange Commission and intends to cooperate with theinvestigation in all respects.  Thisinvestigation is ongoing and the outcome cannot be determined at this time.

 

On February 17, 2004 various plaintiffs havefiled a lawsuit in the State of Missouri alleging that the Company has sent orcaused to be sent during the years 2002 and 2003 large quantities ofunsolicited facsimile and/or other advertising materials to recipients withoutprior express invitation or permission.  The Plaintiffscollectively seek $165,000 in damages plus court costs and other damages as theCourt may deem proper.  The Companyposition is that it is not a party to, nor did it authorize these solicitationsand intends to defend this suit vigorously, although Company’s managementcannot predict the outcome of this proceeding.

 

The Company may be subject to other legalproceedings and claims that arise in the ordinary course of business.Management currently believes that resolving these matter(s), if any, will nothave a material adverse impairment on the Company’s financial position or itsresults of operations.

 

**NOTE14 - REINCORPORATION AND CHANGES IN STOCKHOLDERS’ DEFICIT**

 

Effective April 22, 2003, the Company’s Boardof Directors and holders of shares representing a majority of the voting rightsapproved  a reincorporation of theCompany from the State of Nevada to the State of Delaware.  This reincorporation resulted in a merger ofthe Company with a new Delaware corporation of the same name and the authorizedcommon shares increased from 

 

F-20

----

 

50,000,000 to 100,000,000 and the authorizedpreferred shares increased from 1,000,000 to 10,000,000.  Under the terms of this merger, holders ofrecord as of February 26, 2003 of the Company’s Nevada common shares receivedone share of the new Delaware corporation in exchange for forty shares of theCompany’s Nevada common shares resulting in a forty to one reverse split forall Nevada common shareholders on that date. Each shareholder received an information statement relating to theproposed reincorporation in Delaware and advised that each such shareholder wasentitled to dissent and had rescission rights that enabled the dissentingshareholder to tender the shares to the Company for fair market value prior tothe effect of the reverse split.  Twoshareholders exercised these dissenting rights representing 886,324 NevadaCommon Shares and the Company remitted $8,863 to these shareholders in exchangefor these shares which were then canceled by the Company.

 

Prior to this record date of February 26,2003, the Company’s Board of Directors on January 24, 2003 authorized 48,250 ofConvertible Preferred “A” Shares.  TheseConvertible Preferred “A” Shares entitled the holder to convert one ConvertiblePreferred “A” Share to 800 of the Company’s Delaware Common Shares.  In addition, each Convertible Preferred “A”Share was entitled to 800 “Nevada” shareholder votes.   The Company’s Board of Directors awarded certain Nevada commonshareholders  Convertible Preferred “A”Shares as discussed below.  These Nevadacommon shareholders exchanged 400 Nevada common shares for each ConvertiblePreferred “A” Share.  As a result,43,409 Convertible Preferred “A” Shares were issued by the Company to theseshareholders in exchange for 17,363,640 Nevada common shares.  On April 22, 2003, these ConvertiblePreferred “A” Shares were exchanged for 34,727,280 of the Company’s Delawarecommon shares.  As a result of theseawards, the shareholders that were awarded the Convertible Preferred “A” Sharesbecame the majority voting shareholders resulting in an approximate 98% votingmajority as compared to approximately 43% prior to the awards.  The Company’s Board of Directors determinedwhich shareholders would be awarded the Convertible Preferred “A” Shares.  This determination was based on the shareholder’sclassification as  employee, management,certain creditors, and designated affiliates of each of theclassifications.   In general, thepurpose of these awards was to attract and retain directors, officers,management, employees and consultants by giving them a continuing interest inthe success of the Company, given the financial and operational challenges thatthe Company continues to experience and to encourage certain creditors tocontinue flexibility in negotiating credit terms.    In addition,  aconsultant to the Company also received 750 Convertible Preferred “A” Sharesthat were exchanged on April 22, 2003 for 600,000 of the Company’s Delawarerestricted common shares.

 

Concurrent with the Convertible Preferred “A”Shares authorization, the Board of Directors also authorized 675,000 of votingConvertible Preferred “C” Shares.  EachConvertible Preferred “C” Share was convertible to 10 of the Company’s DelawareCommon Shares.   On January 10, 2003 theCompany’s Board of Directors awarded and issued to certain consultants the675,000 Convertible Preferred “C” Shares which were converted to 6,750,000 ofthe Company’s  Delaware Common Shares onApril 22, 2003, the date of reincorporation to Delaware.   In addition, certain of these consultantsreceived 2,500,000 warrants with an expiration date of January 15, 2004 toexercise the purchase of the Company’s Delaware common stock at exercise pricesas follows:  1,000,000 at $.002;1,000,000 at $.25 and 500,000 at $.50. These consultants exercised 1,792,000 of these warrants during 2003 andthe Company received $200,000 of proceeds. 708,000 warrants were not exercised and expired in January 2004.

 

On May 9, 2003, the Company filed a “FormS-8” Registration Statement with the Securities and Exchange Commission toregister shares in conjunction with the Company’s adoption of a “2003Directors, Officers, and Consultants Stock Option, Stock Warrant, and StockAward Plan” that authorized 9,250,000 shares of Company Delaware Common Stockto be granted.  During 2003, 6,750,000of these shares were granted to certain consultants in exchange for theConvertible Preferred “C” Shares, 1,792,000 shares were issued in exchange forwarrants exercised by consultants and 200,000 shares were issued to theCompany’s former Chief Financial Officer in exchange for services providedduring the fourth quarter of 2003 and for the year 2004.  Under terms of this service agreement, thisconsultant may tender for sale 50,000 of these shares each quarter.

 

On February 7, 2002 the Company filed withthe Securities and Exchange Commission a S-8 Registration Statement withrespect to the adoption of the Company’s Stock Option and Grant Plan thatauthorized the issuance of 5,000,000 common shares.  These shares were primarily issued to consultants for servicesduring the year 2002.

 

F-21

----

 

**NOTE15 - SIGNIFICANT CUSTOMERS**

 

During the years 2003 and 2002 approximately64% and 54% of total revenues are attributable to four customers, three ofwhich represent the Company through private label software products and menuservices. During 2002 these four customers accounted for 28%, 20%, 2% and 1%,respectively, of the Company’s total revenues. During 2003 these four customersaccounted for 20%, 17%, 7% and 20%, respectively, of the Company’s totalrevenues.

 

The customer representing 28% and 20% of theCompany’s total revenues for the years 2002 and 2003, respectively, announcedon August 5, 2003 and effective October 6, 2003, that it was bringing in houseall dietary services and terminated its contract with the Company.  The Company, during 2004, continues tosupply dietary services to certain facilities of the discontinued customer thatrepresent approximately 20% of the total revenues previously earned from thatcustomer.   The discontinued customerprimarily purchased dietary services and supplies from the Company.

 

F-22

----

 

**NOTE16 - STOCK OPTIONS AND WARRANTS**

 

The estimated weighted average grant datefair value of the options granted to employees during 2002 using theBlack-Scholes Model was $0. The fair value of each option grant to employees isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following assumptions used for grants in 2002: dividend yield of 0percent; expected volatility of 103%; risk free interest rate of 3%; and anexpected life of 1 day as the options were exercised on the same day asgranted.

 

During 2003, the Company awarded to consultantsfor services 2,500,000 warrants at exercise prices ranging from $.002 to $.50.

 

During 2003, the Company recognized an $8,000expense for 1,000,000 warrants granted below fair value at date of grant.

 

A summary of changes in the Company’scompensatory options follows:

 
|                             |        | **Employee  Stock Options** |                                   | **Other  Stock Options/Warrants** |                   |       |                                   |
|----------------------------------|-------------|-----------------------------|----------------------------------------|-----------------------------------|------------------------|------------|----------------------------------------|
|                             | **Options** |                        | **Weighted  Average  Exercise  Price** |                              | **Options/  Warrants** |       | **Weighted  Average  Exercise  Price** |   |   |   |
|                             |        |                        |                                   |                              | **Combined  Total**    |       |
|                             |        |                        |                                   |                              | **Options/  Warrants** |       |
|                             |        |                        |                                   |                              |                   |
| Outstanding at January 1, 2002   |        | 200,000                     |                                   | $                                 | .15                    |       | 55,885                                 |   | $ | 4.00 |   | 255,885 |   |
|                             |        |                        |                                   |                              |                   |       |                                   |   |   |   |   |
| Granted                          |        | 750,000                     |                                   | .15                               |                   | 39,435     |                                   | 2.13 |   | 789,435 |   |
| Exercised                        |        | (750,000                    | )                                      | .15                               |                   | —     |                                   | — |   | (750,000 | ) |
| Expired                          |        | (200,000                    | )                                      | .15                               |                   | (55,885    | )                                      | 4.00 |   | (255,885 | ) |
| Outstanding at December 31, 2002 |        | —                      |                                   | $                                 | —                 |       | 39,435                                 |   | $ | 2.13 |   | 39,435 |   |
|                             |        |                        |                                   |                              |                   |       |                                   |   |   |   |   |
| Granted                          |        |                        |                                   |                              |                   | 2,500,000  |                                   |   | .20 |   | 2,500,000 |   |
| Exercised                        |        |                        |                                   |                              |                   | (1,792,000 | )                                      | .11 |   | (1,792,000 | ) |
| Expired                          |        |                        |                                   |                              |                   | (5,000     | )                                      |   | 2.56 |   | (5,000 | ) |
| Outstanding at December 31, 2003 |        | —                      |                                   | $                                 | —                 |       | 742,435                                |   | $ | .50 |   | 742,435 |   |

 

The following table summarizes informationabout stock options/warrants outstanding at December 31, 2003

 
| **Options  and Warrants Outstanding** |   | **Options  Exercisable** |   |
|---------------------------------------|--------|--------------------------|--------|
|                                  |   | **Number   outstanding** |   | **Weighted  Average  remaining   contractual life** |   | **Weighted  average  exercise price** |   |   |   |
|                                  |   |                     |   |   |   |   |
| **Range of   exercise prices**        |   |                     |   |   | **Number   Exercisable** |   | **Weighted  average  exercise price** |   |
|                                  |   |                     |   |   |   |
| $.25-$3.00                            |   | 742,435                  |   | .1 years |   | $ | .50 |   | 34,435 |   | $ | 2.06 |   |
|                                       |        |                          |        |  |  |  |  |  |  |  |  |  |  |

 

The other stock options were issued for servicesperformed in 2003 and 2002.  The otherstock options for 2002 are restated to reflect the effect of the one for fortycommon share reverse during 2003.

 

F-23

----

 

**NOTE17 - RELATED PARTY TRANSACTIONS**

 

Certain officers/shareholders and affiliatesof the Company have provided debt funding to the Company. Terms of the debtobligations are described in Note 7 in the accompanying consolidated financialstatements. Accrued interest related to these obligations is $344,652 and$297,115 at December 31, 2003 and 2002, respectively. Interest expense relatedto these obligations is $86,750 and $94,338 for the years ended December 31,2003 and 2002, respectively, and interest paid to related parties is $39,214and $30,036 for the years ended December 31, 2003 and 2002, respectively.   In addition, the Company awarded certainrelated party creditors convertible preferred stock as part of the Company’sreincorporation to Delaware (see notes 7 and 14).   As a result of these awards, during 2003, the Company recognized$46,006 of additional interest expense that is not included in the relatedparty interest expense presented herein.

 

Effective February 26, 2003, the Board ofDirectors authorized certain shareholders that were Company creditors,management, employees and affiliates to convert 17,363,640 Company Nevadacommon shares to convertible preferred stock that in turn was convertible toCompany Delaware common shares.  As aresult, these shareholders elected to exchange 43,409 convertible preferredshares for 34,727,280 Company Delaware common shares and the Company valuedthese awards in the aggregate at $342,932.

 

F-24

----

 

**NOTE18 - SEGMENT INFORMATION**

 

SureQuest Systems, Inc. has two reportablesegments: Dietary Services and Supplies and Software Sales and Rental. TheDietary Services and Supplies segment provides menu services that consist ofhard copy menus to its customers and sales of menu forms and related supplies.  The Software Sales and Rental segmentprovides sales and rental of its proprietary dietary software, installationservices, training and technical support to the user.

 

The accounting policies of the segments arethe same as described in the summary of significant accounting policies. Assetsof the segment groups are not relevant for management of the business nor fordisclosure. Amortization of the proprietary software is allocated to thesoftware sales and rental segment only.  The software is fully amortized as of June 30, 2003.  Interest expense is allocated on the linesof segment revenue provided. Income taxes, if any, and other unusual items arenot allocated.

 

Each respective segment is managed separatelyand requires different strategic and marketing efforts, although certaincustomers receive services from both segments.

 

Revenues from the Software Sales and Rentalsegment include sales from Canada of $90,837 and $74,857 for the years endedDecember 31, 2003 and 2002, respectively. All other revenues are from U.S.operations.

 

**SegmentLoss Allocation**

 
| **Year Ended December 31,**                |   | **Dietary  Services and  Supplies** |       | **Software  Sales and  Rental** |       | **Total** |   |
|--------------------------------------------|--------|-------------------------------------|------------|---------------------------------|------------|-----------|--------|
| 2003                                       |   |                                |       |                            |       |      |   |
|                                       |   |                                |       |                            |       |      |   |
| Revenue                                    |   | $                                   | 566,607    |                            | $          | 781,350   |   | $ | 1,347,957 |   |
|                                       |   |                                |       |                            |       |      |   |
| Interest Expense                           |   | 84,155                              |       | 116,051                         |       | 200,206   |   |
|                                       |   |                                |       |                            |       |      |   |
| Amortization – software               |   | —                              |       | 134,561                         |       | 134,561   |   |
|                                       |   |                                |       |                            |       |      |   |
| Segment loss                               |   | (296,287                            | )          | (471,727                        | )          | (768,014  | )      |
|                                       |   |                                |       |                            |       |      |   |
| 2002                                       |   |                                |       |                            |       |      |   |
|                                       |   |                                |       |                            |       |      |   |
| Revenue                                    |   | $                                   | 567,865    |                            | $          | 635,408   |   | $ | 1,203,273 |   |
|                                       |   |                                |       |                            |       |      |   |
| Interest Expense                           |   | 66,474                              |       | 74,381                          |       | 140,855   |   |
|                                       |   |                                |       |                            |       |      |   |
| Amortization – software               |   | —                              |       | 293,585                         |       | 293,585   |   |
|                                       |   |                                |       |                            |       |      |   |
| Segment loss                               |   | (245,728                            | )          | (591,724                        | )          | (837,452  | )      |
|                                       |   |                                |       |                            |       |      |   |
| **Segment Loss Reconciliation**            |   | **2003**                            | ** ** | **2002**                        | ** ** |
| Total loss for reportable segments         |   | $                                   | (768,014   | )                               | $          | (837,452  | )      |
|                                       |   |                                |       |                            |       |
| Unallocated amounts:                       |   |                                |       |                            |       |
| Unrealized loss, net of realized gain-land |   | (22,467                             | )          | (127,300                        | )          |
| Debt settlement                            |   | —                              |       | 30,294                          |       |
| Net loss                                   |   | $                                   | (790,481   | )                               | $          | (934,458  | )      |

 

F-25

----

 

**NOTE19 - SUBSEQUENT EVENTS**

 

On February 27, 2004, the Company announcedthrough an 8-K filing with the Securities and Exchange Commission that theSecurities and Exchange Commission has issued a Formal Order of Investigationto conduct a non-public investigation of the Company and, but not limited to,its officers, directors, promoters and broker dealers for at least the periodJanuary 1, 2002 through the present (see Note 13).  The Company has voluntarily produced all documents requested bythe Securities and Exchange Commission and intends to cooperate with thisinvestigation in all respects.

 

On March 5, 2004, the Company was served asummons to appear in the Circuit Court of St. Louis, County, Missouri.  The Plaintiffs allege that the Companybreached the Telephone Consumer Protection Act by having sent or causing to besent, or allowing to be sent, large quantities of facsimilie, and/or otheradvertising materials to recipients in Missouri.  The Plaintiffs seek damages in the amount of $165,000 plus courtcosts and other relief granted by the Court. The Company has retained counsel in Missouri to defend against thiscomplaint.  The outcome of this mattercannot be determined at this time.

 

On March 11, 2004, the Company entered into a$100,000 promissory note agreement with an unaffiliated creditor.  Terms of this note include proceeds of$100,000 provided in $20,000 monthly installments with the initial installmentreceived by the Company on March 11, 2004, to be followed by four $20,000installments on the 15th day of the month beginning April 15,2004.  Repayment includes a payment ofaccrued interest due as of July 31, 2004 and monthly payments of $1,029beginning September 1, 2004 and each month thereafter until August 1, 2013 atwhich time the remaining principal balance of $93,419 is due.  This note bears simple interest of 12%.  In addition, the Company issued the creditor1,000,000 restricted common shares.  The Company also agreed to remit to the creditor a 5% royalty from therevenues received on dietary clinical module sales, 2 1/2% of which will beapplied to reducing this obligation, for as long as this promissory note isoutstanding.  Presently, the Companydoes not offer a clinical module product, but should the Company develop thisproduct, the royalty arrangement will be in effect.  The Company cannot be assured that the creditor will fulfill itscommitment to fund the agreed to $20,000 installments.  If the creditor defaults, the monthlypayment and common stock issued will be reduced by the percentage of thedefault to the $100,000 commitment.

 

F-26

----